Must one pile on Jacob Weisberg? Why yes, one must.
Not because he is wrong that this crisis raises serious problems with market structure. It does. It also raises serious problems with regulatory structures. It raises serious problems with everything we were doing.
I am not trying to sound like those dogmatic libertarians who declare, any time problems are detected in the markets, that they merely exist because we do not have "true" capitalism. Sometimes this is true--the interstate trucking market has been indisputably improved by deregulation. And sometimes it isn't; the market for banking services has been (to my mind) indisputably improved by the FDIC. Markets are complicated things that rest on a mixture of law, custom, and individual action. There is no libertarian state of nature in which human beings survived without some form of coercively enforced rules. All libertarianism can do is maximize the scope for individual action within that framework.
To put it another way, society has multiple possible equilibria, and some of those equilibria are better than others. Removing the existing set of rules does not, of itself, guarantee or even make it particularly likely that we will arrive at a better one.
But that, of course, also holds true of government action. Punishing the bankers, restraining them from taking certain sort of risks, or giving regulators vastly more power over them, does not in itself guarantee that we will get a better outcome. I see many people who do not know very much about finance demanding that we reverse the much-vaunted deregulation of the 1990s. I see very few of them proposing a coherent regulatory framework that will get us to that happy state, much less a political process that will achieve this desireable regulation rather than something else which better suits the legislators.
Nor is there any particular proposal for preventing that institution from falling prey to the same forces that grip the regulated industry. I have said it before, but it is worth repeating: the regulators became overconfident in the same way, and for the same reasons, that the bankers became overconfident. Just as a long and unusually rosy period in the housing market convinced the bankers that they had gotten better at pricing credit risk, a long period without a large bank failure persuaded the regulators that they had gotten better at regulation. They believed that their computer models, and an improved understanding of how markets and the economy worked, would allow them to see problems in time and halt them. Obviously, they were wrong.
Now, obviously, you can tell the institution "Don't get overconfident! Be extremely risk averse!" But for the next ten years or so, this is superfluous; the bankers themselves have learned to be extremely risk averse, a lesson that they will, at least for a while, employ in building their portfolios. And longer than that, you cannot commit any political institution to a particular stance. For one thing, extreme risk aversion has its own costs, and the fact that we currently wish we had been more risk averse does not mean that ultra-cautious regulatory policy is actually optimal, any more than it would be a good idea to act, permanently, on your wish that you hadn't left the house and walked into the path of that car.
Moreover, it is meaningless, in a mixed economy like ours, to attribute a massive failure like this to either "the market" or "government regulation". The people who think that this can all be traced back to the CRA are wrong. But so are the people who think that the only problem was too little regulation. Just as some actions by private firms unquestionably put the economy at risk, so did some regulations. It is indisputable that mark-to-market accounting caused potentially solvent firms to suffer ratings downgrades. It is also not disputable that a slew of rules surrounding the credit quality of the securities that pension funds and insurance companies can invest in helped trigger the horrific cascading liquidity crises that, as much as anything, forced the government to step in and bail out the banks. If these institutions had not been forced to keep their assets concentrated in "investment grade" securities, they would not all have had to run for the door at once as soon as there was a ratings downgrade. Those downgrades, of course, hit the balance sheets of other institutions, some of which found themselves next in line to be trampled by the stampede. Those regulations were good at protecting against individual firm failure. But when there was a systemic problem, they made things worse, not better.
A doctrinaire libertarian might conclude, then, that what we need is to eliminate regulation. And indeed, some have said just that. But the regulations are a very good idea 99% of the time when the problem is individual, not systemic. More importantly, it's hard to think of an adequate substitute for those regulations in the face of a public that needs savings vehicles, but cannot do advanced financial accounting. Preventing a cascade by allowing people to regularly lose their insurance coverage or pensions is not an obviously good tradeoff. I'm hard pressed to say how it's a non-obviously good tradeoff, either.
Similarly, a doctrinaire liberal may declare, as many have, that the problem is "free markets". But you can't pick "free markets" out of this knot any more than you can pick out "regulation". The system went wrong as a system--it's not that there's some broken part you can swap out. You can imagine an alternate world in which we did not have the institutional credit quality requirements, or mark-to-market accounting, in which the banks limped through a wave of mortgage defaults without systemic failures. You can also imagine a world in which the regulators had somehow been better at regulation, and the market actors had been prevented from taking catastrophic risks. But that's all we're doing: imagining. We have no proof that either state is safer than the current one.
We can tell post-hoc stories; gold bugs favor various almost-panics in the nineteenth century, while liberals like to claim that it was the wisdom of FDR's regulation. But much of this is post-hoc, ergo propter hoc. What we know from behavioral and experimental economics suggests another explanation at least as plausible: that as long as people think bubbles are very likely, you don't get bubbles. For example, for thirty-five years, the memory of the 1929 crash was seared into the brains of the public consciousness, and the market remained relatively down to earth. Then the generational memories faded, and you got the late-sixties bubble that led into a decade-long stagnation.
The farther I go into this crisis, the more leery I am of any neat narrative explanation of financial panics--or indeed, many other rare phenomena. More on this later. For now, a parting thought: in complex systems, there can be no such thing as an individual villain.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
"...a doctrinaire liberal may declare, as many have, that the problem is "free markets"..."
I don't think liberals have a problem with free markets. I think they have problems with rigged markets that are purported to be "free."
in complex systems, there can be no such thing as an individual villain.
Huh, I thought all it took was a butterfly flapping it's wings... ;)
in complex systems, there can be no such thing as an individual villain
McArdle may want to notify the FBI that they don't have to worry about a shortage of agents available to investigate fraud in the bogus mortgage market. She has sounded the all clear! Nobody could ever have anticipated terrorists flying ..er, greed-crazed mortgage packagers and ratings agency grifters deliberately setting up worthless securities.
The stench of deliberate manipulation and falsification of risk hangs heavy over the mess that our financial markets have become. But here is big Megan with her can of deodorizer. THERE ARE NO VILLAINS. That's because in McArdle's twisted mind, there is nothing wrong with dishonesty that results in personal financial advantage - as long as you can get away with it.
Megan's personal brand of libertarianism isn't very special or complicated. It is more commonly called predation.
Sounds good. As a layperson - who supports Obama - would love a nuanced argument on this. Looking forward to debate after the election, that doesn't anchor itself on "liberals are socialists who pal around with terrorists", in lieu of a clearly defined opposition (why, oh why did McCain decide not to argue the issues? I won't cry about the coming victory, but would have enjoyed a strong, reasoned opposition).
there is nothing wrong with dishonesty that results in personal financial advantage - as long as you can get away with it.
Feel free to name names.
No individual villain? What about George Bush?
I loved your last line.
I have not responded to Weisberg, based on "please don't feed the trolls" principles.
Name names? Individual villains?
Fuld. Every executive whose firm bought or sold the dogshit mortgage-backed securities. Um... Andrew Lahde confessed, didn'tcha read that hilarious letter yet?
Pointing to some narrow positive example like deregulated trucking(!) versus the enormity of the current financial mess is ridiculous. The regulators became overconfident? The regulators were FIRED and replaced with ideologues - that's the intended result of libertarianism.
Please explain in a future post how the logical conclusion of libertarianist, deregulationist philosophy is not coporate monopoly, rule of the "fittest", social darwinism, and, yes... serfdom?
If it is not, please stop calling yourself a libertarian and start calling yourself a supporter of "mixed-economy", cuz that's what you're asking for above.
it may be the case that in an upheaval of this magnitude there are no "individual villains," only because an individual villain lacks the ability to wreak this much havoc. problems like the current interlaced economic problems (credit markets, housing markets, stock markets, earnings, consumer confidence, etc) largely require a perfect storm which, thank god, don't happen very often. that perfect storm, however, encompasses numerous villains, and creating better storm warnings and storm shelters in the future justifies the effort to sort as many of them out as we can.
put differently, when we see that regulators had a role, the whiz kids creating increasingly obtuse investment vehicles had a role, Congress had a role, the President had a role, investment and commercial bankers had a role, the removal of Glass-Steagall firewalls had a role, CRA had a role, Fannie and Freddie had a role, the Fed had a role, individual consumers and home buyers had a role, appraisers and loan originators had a role, etc. it is easy to wave one's hand and say the responsibility is too diffuse to bother with. better, it would seem, to roll up our sleeves and say "in what way was each of these players a factor, and what does that tell us about the future?" Is that hard work? Sure. Is it worth it? Well, the 2 trillion in lost retirement funds would pay for a lot of investigation. . .
Every executive whose firm bought or sold the dogshit mortgage-backed securities.
You're saying they are all guilty of fraud (or at least "dishonesty"), merely for buying or selling these particular securities?
From the article:
"Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along. "
Hehe. That's Megan!!!
His argument is very complelling and Libertarianism is in fact dead. Good riddance by all accounts.
Megan -
I agree that there were many factors, and that part of the problem is that humans, including regulators, get carried away at times. Still, I don't see how you can write about various contributing factors and not even mention Fannie and Freddie. Where did all the lower lending standards originate?
Banking is one of the most heavily regulated industries, so if it was just a question of 'more' or 'less' regulation, our problems would have occurred in trucking or telecoms, not banking. We need to focus on more efficient, effective regulation. Avoiding what we did with Fannie and Freddie (and yes, the Clinton quotas for the CRA) is a good place to start.
I love how the reaction on the left to this event has been the call for "more regulation" with little or no specifics as to what sort of regulation would have prevented this, or would prevent similar circumstances in the future. It's as if regulation is a sort of dial which one can turn up and turn down without reference to specific policies. Such policies may exist, but they need to be examined with more than just the assumption that they are necessary just because they are something.
Megan,
Twice now you have claimed:
"The people who think that this can all be traced back to the CRA are wrong."
They have made a case - you have not rebutted it nor linked to a convincing rebuttal. I don't think you have adequately substantiated your case. The best you have offered was approximately "The data doesn't track you" - another unsubstantiated assertion.
While there were unquestionably other causes (in particular by the insurers but by virtually every other actor as well), this action (CRA) does seem to be the root cause. The fact that it occurs quite early in the chain of causality (loan initiation) is quite telling as well.
Otherwise, some good thoughts. I am certainly not a doctrinaire libertarian but I do trend that way. :) Sometimes I need someone to remind me why I am not.
Investment banks weren't required to hold investment grade securities. Look how long they lasted. I think it is safe to say that banks *wouldn't* have lasted long if the markets knew the true state of their holdings. The banks could have decided to not mark to market but when their assets area all rated B-, they aren't going to be able to get financing. Mark to market is simply a boogieman.
If the banks had lied about their holdings, then they might last longer. But I'm not sure that "lying about your balance sheet" is a good principle for economic health or something that libertarians would advocate.
A modest proposal ...
I blame the women. There are more women working in the finance industry than there ever have been, and markets are much more volatile and subject to catastrophic failure than they ever have been, too. Surely these facts must be related. Of course, the numbers are small in an absolute sense, and even smaller when you look at top executives, but the evidence for feminine perfidy is undeniable.
Since things got bad very quickly this fall there must have been some tipping point - some individual woman whose hiring was responsible for the meltdown. We just have find her - but be careful, she's probably a witch, so bring a flame thrower when you come to get her.
But just to be on the safe side, all women should be exiled from Wall street and never allowed to work there again.
Technology was a crucial element in making the banking and financial institutions into the behemoths they became. Information technology revolutionized the trading and even the creation of financial instruments. Modern technology allowed that hoary old myth, the myth of a new era, to take hold and soar.
So on the foundation of the new technologies the old cycle repeated itself. The 20's too were an age of technological innovation which promised a new era. These myths and human nature remain the same.
Without question sound central bank policies and bank regulation and traditional regulation of the capital markets would have prevented the bubbles. Almost without question too is the fact that these things didn't stand a chance against the raw political and cultural power that accrued to the financial world as it took off on its bull run.
The calls now for new regulation are as understandable as they are meaningless. The masters of the universe are discredited. There will be no need for additional regulation to protect peoples money because they will now know not to trust anyone with their money. Bankers and financial experts and the like will be treated, as they always should be, with a healthy degree of suspicion if not contempt.
The whole debate and the process of coming to grips with what has happened has been interesting. I think a post in The Economist blogs summarizes best how the financial markets got here.
I think your man used what a blogger in Volokh Conspiracy has generoulsy called "platitudes." McCain, yes, could have done better if instead of saying that he would 'fire Chris Cox' had said that the decision to let the investment banks increase their lending to capital ratio a few years ago was a mistake if that is why he found fault in Cox. I think 'greed on Wall Street' is a partial explanation and mentioned by Palin but that should have been fleshed out by asking what wennt wrong with risk management. 34% of the seuritized mortgages are from CA and have a 'Califrnia problem' (see the WSJ today). The problem is sort of analogous to the CIA not knowing that we might not find WMD in Iraq, but maybe you'd think it wouldn't be so hard to know what might be going on in California.
A complex system has major trouble and we can definitively pin the free-market aspect of it as the problem. Then we move from that to a far-reaching repudiation of all ideas related to it - so drug legalization, fewer federal laws, less government intrusion into private lives, a return to a more historical view of the constitution, etc., those are all out the door as well. Move along everyone, nothing to see here. Don't trouble yourselves with any of that libertarian thinking. Weisberg has settled things once and for all.
Reminds one of Falwell telling his flock not to worry about all that evolution nonsense.
How about if we instead blame everything on the government's desire to see more and more people own homes? Oh, no, it was the deregulation. How about if we blame it on good old foolishness and greed? Well, sure, but you see, that goes hand in hand with free-market libertarianism, whereas benevolent government rulemaking is always wise and selfless.
What about doing away with the Graham bill signed by Clinton in 1999 that deregulated regulations that were put in place after the Depression THAT SEEMED TO BE WORKING. It was only because of greed that something like this would receive so much pressure from inside to be signed. We need a maverick to bring it back.
Repeat after me Meagan: "I, Meagan McArdle, have absolutely no idea what is currently going on."
Do you remember that old adage Megan? Better to remain silent.
Look it's clear at this point that the financial concepts your world is built upon is collapsing around you. Trying to pretend like you still know what's going on is fooling no one.
It's time to quit demonizing those "liberals" you hate so much and do what any intelligent person would do: realize the financial world has SHIFTED underneath you, take a step back, keep your mouth shut, THINK, take into account new facts, question your premises, make a plan and THEN step forward and say something.
As it sounds right now you just sound pretty absurd trying to defend some patently indefensable points.
John -
Did you have anything you actually wanted to say? I'm sure it was emotionally satisfying for you to vent a bit, but it would be more interesting for the rest of us if you made a specific point.
Julia -
Do you mean Gramm-Leach-Bliley (or did Billy Graham do something with Clinton that I don't know about?)? What did that have to do with all of this, other than that it happened within about a decade of the crisis? The core problem was bad loans, and it was Clinton's (and Barney Franks') pressure on banks to make those bad loans (and to get Fannie and Freddie to insure them) that kicked off the lowered standards that led to so much trouble.
Megan,
Didn't you, committed Libertarian as you re, support the invasion of Iraq? Was not invading Iraq to Libertarianism what declaring martial law is to the cause of Democracy? Libertarians - particularly the peculiar brand of Bush style authoritarian libertarians - are great at making excuses for why their great ideas produce cataclysmic failures. 'Well, you didn't predict it would turn out badly exactly the way it did, so you're just as wrong as me.' Bullshit. Just like the above article. Someday, we'll get a fair, accurate and honest appraisal of what went wrong. I'm predicting it won't be written by Megan McArdle.
Libertarians can always fall back on other important issues they deeply care about. Silent dancing comes to mind.
Megan McArdle voted for GWB, now widely considered the worst President in American history, TWICE. She did this because she believed that Bush would reduce the meddlesome interference of Government in the superb functioning of greed-driven private corporations. Mission accomplished!
Now, with the financial markets in ruins, and Bush pouring trillions into re-regulated semi-nationalized greed-crippled corporations, she comes before us to explain that she really has no coherent economic or political beliefs at all, other than that both markets and regulators should function properly. This profound insight, plus a fare card, will allow you to ride on the New York subway.
When will the Atlantic get rid of this towering mediocrity?
I think Megan consistently and quite credibly makes the case that all of this was not really foreseeable, and even if foreseeable, not practically preventable within the prevailing market psychology and regulatory framework.
But after years of reading Big Picture, Calculated Risk, et al, I don't entirely agree. It was not especially difficult for an Alan Greenspan to recognize the fundamentally aberrant nature of mortgage underwriting circa 2002-2007 - although he apparently did not. It was not especially difficult to recognize the systemic dangers of enormous, opaque betting pools - Buffet, Soros, and Volcker did so far in advance of the real consequences. The five major iBanks got a license to play Russian roulette from a colluding Treasury department, and they all ended up dead by suicide.
Megan's arguments seem to come down to this: no one was smart enough to see this coming, therefore no one is truly responsible. And indeed, this is a complex crisis with lots of interrelated causal factors. But to imply, as Megan seems to do, that political and economic ideology had nothing to do with it, is to deny that there were smart, prominent, credible people who did predict some elements of the current crisis - and that those people generally did not support the prevailing market fundamentalist perspective.
I think it's worth a thought experiment - would the current crisis have turned out different if, say, Rubin had been Treasury Secretary, and Volcker Fed Chairman? Better? Worse? Why?
That would be a truly relevant experiment. As mere voting dorks, the only way we get to express our opinions is through the President and Congress who appoint and approve those stewards of our system.
Piffle. It's even worse than that, ScottB. Not only is libertarianism not dead, it does not have to be amended one jot or tittle, the doctrine does not need to be modified in the slightest. At least according to these defenders of the faith.
Really? Not even a little?
What kills a supposedly 'intellectual' movement is not that the members display completely ossified mental processes, but that the lay public gets the idea that this is the case. I think this is what we're seeing right now.
The public is catching on to the fact that no matter what happens, those who preach a free market orthodoxy aren't going to change. 'Socialized' medicine is still a bad idea. The market is always the best arbiter of a prevailing wage, and those CEO's were getting paid every bit of what they were worth. Government is not the solution, government is problem. Market fundamentals are sound. Our ongoing series of crises won't affect the rote recitation of these bromides, even as we're knee deep in the Big Muddy, and still being urged on.
And so it goes. Give it another generation, and, well, it won't disappear, per se. The intellectual pretense is just too much of a good cover for certain people to let it go. But expect it to emerge with a slightly different name and organizing principle. A sort of Creationism cum Intelligent Design transformation as it were.
I'm confused. Has Megan, who once dubbed herself "Jane Galt," finally stopped pretending to be a libertarian?
The historical destination for Libertarians (and whatever McArdle thinks she is) is to be shelved along with the Anarchists, as quaintly interesting enthusiasts for an emotionally rewarding, but completely useless, ideology.
Libertarians are like hookers they go where the Johns are.
Retarded ideology perpetrated on retarded population of America by an intellectually challenged "woman" called Ayn Rand.
Atlas Shrugged was a cute joke -- for about two minutes -- when it came out. Let's not indulge ourselves in protracted adolescences shall we?
Ann -
What G-L-B had to do with this (as much as I like Jim Leach) was the removal of the walls between commercial banking, investment banking, and other types of financial institutions.
When the mortgage-backed securities (and some other masters of the universe-created derivatives) tanked, the pre-GLB divisions would have helped contain the damage. there would not have been as much contagion through the financial sector.
Interesting, esp. from a psychological standpoint, to see her
critics bring up Iraq, her voting record, etc., when she herself
gave the devils their due, and weighed the possible worldviews
of doctrinaire libertarians and liberals. Megan said once that
libertarianism ought to be held as aspirational, rather than
normative. Big words, eh, HH?
Meanwhile, liberals of a certain ilk, like Barney Frank, pant after
bigger government (just read his blurb on a book about same),
all stemming, I am sure, from Ward's 1883 DYNAMIC SOCIOLOGY
and the oh so scientific wish to speed cultural evolution, up to
the putrid beliefs of a Tip O'Neill, who said that gov't exists
"to help people." Sure, through fees, fines, and taxes. Thanks,
pal.
Yeah, I agree with the basic idea that no single cause or item can be pointed to. Really there were several causes or chain of failures that allowed this. CRA and associated politics did play a part. As did Chris Cox not even appointing regulators to related posts to watch over these types of investment bank purchases of mortgages. Government accounting rules played a role (causing banks to be forced to undervalue investments…). On and on. Many problems all cascaded and failed to stop the other failures or even added to them....
Such scorn for libertarianism when it was the most heavily regulated sector of the economy that failed.
Here's a neat little mental workout for yall: To believe that the "market," is somehow more foolish than the government is to believe that the average sum of wisdom and knowledge of all of its participants acting in their own self-interest is somehow less than your average bureaucrat who achieved his position mostly through seniority (as those in charge of regulatory bodies are not generally elected). Even if each bureaucrat were a hypergenious intellect that knew as much as 10 average people, that wouldn't even put a DENT in the collective wisdom and knowledge of the participants in a market acting in their self-interest.
So, explain to me exactly how in living hell I'm supposed to believe heavy regulation is supposed to help. Even if this current crisis was deregulation's fault (which it was not), it would take thousands of years for deregulation to cause the poverty, misery, and suffering that socialism and totalitarianism have subjected the world to.
I have read several blogs that were more critical of Jacob Weisberg's commentary than Megan's entry. But the level of eye-gouging and kidney-punching here seems to be several magnitudes greater.
Is this because she is a vegan?
Posted by Ann | October 22, 2008 9:15 PM
"Do you mean Gramm-Leach-Bliley (or did Billy Graham do something with Clinton that I don't know about?)? What did that have to do with all of this, other than that it happened within about a decade of the crisis?"
Very little to nothing. Even the New York Times traces it back to a SEC rule change. Not that deregulation bill. But blaming a deregulation bill just sounds really satisfying to some people... Then again, to play to their audience, the NYTimes chose to call the administrative rule change in question ‘deregulation’. None the less, it was not related to that bill.
Megan is making a very fair statement- "I don't know what caused the crisis, and you don't know either, so don't claim some extraordinary powers of insight." If any of you liberals are agnostics, then perhaps you can relate to that statement.
When people don't fully understand the concept of evidence, they will continue to spew whatever creative and interesting theories they've invented.
You know what, I didn't vote for Bush in 2000 nor in 2004. But I still think you all should lay off of Megan. People work on the basis of the information they have in front of them at the time, which is the best they can do. Sometimes they look back and realize they made a mistake. You know that she wouldn't vote for Bush today. She's learned from it and has moved on.
Megan is gracious enough not to defend herself, or may just be lucky enough to have thick skin, but the amount of deranged vitriol aimed at her in this blog is enough to make any sane person want to write on her behalf. You don't have to agree with Megan. But I've read some horrible stuff in the blog's comments regarding everything from her looks, intelligence, competence, integrity, and kindness. Yes, she is putting herself out there by writing a public blog. But this does not mean that she is not a human being. Writing opinions with which you disagree does not justify a character assassination.
where are all of the broke libertarians?
Weisberg's been waiting for the crisis of capitalism. I don't take that guy too seriously, but good job debunking him.
hmmm. lots of happy anklebiters. reminds me of how gleeful some people were when GWB's reputation was being tarnished by lots of dead Iraqis. I've certainly taken a second look at my deregulation bias. Canada's banking system here is reputed to be the soundest in the world and carefully regulated. I don't know how true that is. I do know that our bankers have a stogy reputation and it is linked to the stogyness of Canadians. You tell people here the mad percentage of interest only mortgages that were being given in California and they just look amazed. So America took a risk in an attempt to maximize the realization of the American dream - now we know that it was too far. You don't need regulation to tell people of this generation not to pick up the snake again. The question for me is whether some kind of regulation should be put in place to keep a lid on the next generation of people who won't remember this. Or perhaps to allow individual failures in retirement investment vehicles but insure them with public money or require insurance coverage? Perhaps that would be better than a system that distributes risk so widely that the entire system trips in the end and requires massive public money to float.
As a quasi-Libertarian I really thought this an apt article. Certainly the free market is not the thing that goes bump in the night and sends society into a financial tailspin. Neither is regulation the boogie man in all things involving banking and finance. The knot you speak of is made of these as well as other threads and too many looking for an easy buck.
zeitgeist -
Thanks for the explanation, but I understand that G-L-B formally eliminated many of the barriers of Glass-Steagall (I spent many years having to explain to students in Hong Kong the weird divisions in US banking that didn't match the rest of the world, how it seemed like a good idea after the Great Depression, etc.).
But I still don't understand how it increased the crisis, when in fact it helped strong, diversified banks such as Bank of America and JP Morgan Chase buy up less diversified banks such as Merrill Lynch and Bear Stearns.
I agree with Thomass that G-L-B had nothing to do with the crisis (except perhaps as a convenient scape-goat for Republican deregulation). In fact, there's much more evidence that G-L-B made the crisis less severe.
The one place, of all possible places I would not try to defend a Libertarian approach, is banking. Do we need more regulation over manufacturing? Research? How about your back yards, or mine? Banking is like the nuclear hazardous waste aspect of our industrial economy. Very tricky to change design, fraught with unintended consequences from even minor changes like SOX which brought us "mark to market". I also don't recommend a Libertarian approach to nuclear reactor design, or nuclear waste treatment and disposal.
Ann said:
It is easy to test this. Were any firms brought down by activities that they could not have engaged in under Glass Steagall? The principal prohibitions were that commercial banks could not be affiliated with entities engaged principally in broker-dealer activities, and broker-dealers could not engage in the business of deposit taking.
Was the problem with investment banks that they had runs on deposits? No, because the major investment banks generally stayed out of the deposit taking business.
Was the problem with commercial banks losses from their broker-dealer activities? No, it was losses on crappy mortgage loans and write downs on highly-rated securities that they have always been able to hold for their own accounts.
Megan: The people who think that this can all be traced back to the CRA are wrong
Well sure, there were other factors. If that's all you're saying, I agree. The FDIC insulated people from the downside of their risky investments, unlike in Britan where only 90% is insured above a particular amount. And there seem to be problems with appraisals and checking for assets (why weren't the use of tax returns mandatory. They could have been.)
It is also not disputable that a slew of rules surrounding the credit quality of the securities that pension funds and insurance companies can invest in helped trigger the horrific cascading liquidity crises
How?
The CRA does seem to be the largest single problem in this mess. Would anyone disagree? It strongly incented loans to people who couldn't or wouldn't repay them and it reduced the amount of cash that had to be held against the loan from 10% to 2.5% indisputably inflating the bubble and expanding those involved. The rising prices caused by this led to the decreased perception of risk so often blamed.
Financial Crisis: By Government and For Government
The current housing and financial crisis was produced by the Government, by Rep. Barney Frank (D, MA, Chairman of the Financial Affairs Committee) and Sen. Christopher Dodd (D. CT, Chairman of the Senate Banking, Housing, and Urban Affairs Committee), and supported by most of Congress.
The current cry is "not enough regulation", by the congressmen and senators who were in charge of the current regulation. Where is the deregulation that fed the current crisis? Fannie Mae and Freddie Mac were directly regulated by the Congress through a special regulatory authority OFHEO reporting to the House Financial Affairs Committee (Chairman Barney Frank presiding for the last two years). The claim is that people calling for less government and more freedom are misguided -- they just don't understand the threat of big business and Wall Street.
The failure of "regulation" in this financial crisis is the failure of Congress to regulate its own desire to buy votes with easy mortgages. The financial markets did just what most of Congress wanted. They lent money to Fannie Mae and Freddie Mac (off budget) so that FanFred could do the bidding of Congress. They traded in the mortgage securities that Fannie and Freddie were buying and selling in the market.
Congress is now saying "Yes, FanFred offered to buy up those risky loans, but you mortgage lenders should have had restraint and not made them so risky. How could you expect FanFred (or Congress) to look at the loans we were buying to see if they were good? You are greedy, bad men."
The Government removed Fannie Mae and Freddie Mac from market discipline by guaranteeing them implicitly as its own creations, then told them what to do through legislation, pressure, and its own special regulator OFHEO. Fan and Fred were staffed with high paid government elite.
These two companies ruined world financial markets with the power and credit to buy up 90% of all U.S. prime mortgages and 20% of all subprime. Fannie and Freddie together guaranteed $5.4 trillion of housing debt (that is $5,400 billion, or $5,400 thousand million). Compare that to the previous $5.5 trillion budget debt of the US.
Many big banks jumped on the bandwagon. They lost sight of the risk in holding subprime loans. Hey, they could always sell their inventory to Fannie and Freddie. Except, when home prices fell a little, they couldn't sell these loans to anyone.
The market value of subprime loans fell in half when Fannie and Freddie collapsed and could not support that market with its increasing borrowing and purchases. That caused massive losses for institutions worldwide holding the other 80% of subprime mortgage bonds.
Congress ran Fannie Mae and Freddie Mac into the ground, plucking presents along the way. Congress set up Fannie and Freddie, took full responsibility by effectively (but unofficially) guaranteeing repayment of its debts, removed it from private market discipline, staffed it with the highly paid political elite, funded it through massive private borrowing outside of Government budget accounts, commanded it to do risky business below usual standards, restricted its regulation to a special office set up by Congress (OFHEO), and then ignored that regulator.
Any opposition came from some Republicans and the Bush administration, who were ineffective.
Blaming Bush is misguided; blaming the free market blames something that was not allowed to operate. Blame the corruption of Congress, mostly the Democrats. They assumed oversight of a huge off-budget operation to grant risky loans, and ignored all corruption and warnings.
This is a failure of IN PLACE regulation, actively suppressed by congressional committees who looked the other way, because it was in their political interest for Fannie and Freddie to do just what they were doing. Their motto was "So far, so good".
My detailed review, with links to sources, is at We Guarantee It
The people who think that this can all be traced back to the CRA are wrong.
That's like saying a match can't burn down a forest because it doesn't have enough potential heat.
Sounds like you are begging the question by suggesting the problem cannot be properly analyzed.
Anyway, the conclusion that reads like you are blaming "society" for everything sounds distinctly liberal.
It would truly be a coup if you could pull off a liberal defense of libertarianism, wrapped up in an analysis of an obvious market failure...
btw, I'm not sure that we have to concede that all regulation is a two-edged sword, somehow (your pension fund example is unpersuasive).
Even if it were, that hardly means that we, as a society, shouldn't choose which edge of the sword we'd like ourselves cut, right? Seriously, it wouldn't be an argument for "libertarianism" - it's just be a factoid.
Megan writes:
a long period without a large bank failure persuaded the regulators that they had gotten better at regulation
Um, no. That's not what happened, or not all that happened. What happened is that new speculative practices and vehicles went unregulated during a period of time when a laissez-faire ideology dominated the intellectual landscape and was being exported to those "poor, stupid" 3rd world nations as the "Washington doctrine." The idea that things would "just sort themselves out" as long as they were just drenched in market logics was rife. And because the least-regulated sectors were the ones where the most money was being made, immediate results seemed to confirm this credo.
I'll ignore the tin-foil hat types blaming CRA: Megan is intellectually honest enough to know better. You didn't need CRA to explain what happened, and the great bulk of the defaults weren't on CRA loans. All you need is popular mania and the delusion of crowds: the loans weren't considered bad because the idea of a mortgage going underwater was unthinkable: everyone "knew" that the housing market was going into permanent upwards territory. Each loan was essentially a check that the lender could make to itself. And the borrower had to play along or risk missing the equity boat - or even the housing boat.
And the computer models and vehicles built on complex abstractions? Pure hubris, built on a skeleton shaped like the Ricardian vice itself. Only heterodox economists and social theorists - who weren't being invited to the fun parties with the hooker and the blow - dare to remark on the nested reflexivities in these models. The result is a kind of recursive Ponzi scheme that finally hit its base-case. Hope you're having fun: I sure am.
Please explain in a future post how the logical conclusion of libertarianist, deregulationist philosophy is not coporate monopoly, rule of the "fittest", social darwinism, and, yes... serfdom?
Uh, for one thing "libertarianists" (presumably meaning super-doctrinaire libertarians) vigorously oppose the existence of corporations as state-sanctioned impediments to perfect competition.
It would truly be a coup if you could pull off a liberal defense of libertarianism, wrapped up in an analysis of an obvious market failure...
A defense of libertarianism based on the notion that people's inherent rightness in action is inversely proportional to their perceived power (irrespective of the nature of that action)? Here goes: there are no libertarians in Congress.
I agree with much of this, but I do not agree that regulators simply became "overconfident".
It was a belief in a laissez-faire attitude to derivative products that resulted in the incredibly varied, complex and opaque instruments becoming so prevalent. In a more extreme version, it is the same laissez-faire attitude that decries the necessary recapitalization (read, partial nationalization) of the banks as "socialism".
There has been a failure of ideas here, not just a complex system failure. The same failure of ideas can be seen at the root of inaction over climate change, the under-commitment of forces to the wars in Afghanistan and Iraq, the chaotic immigration situation, the cost and coverage of health care, growing income inequality, the ballooning federal debt, etc.
I am a conservative, but at some point an intellectually honest person has to acknowledge that a mental adjustment is required, and we need to look at these problems from a fresh perspective (but not, in my opinion, a doctrinaire "liberal" one). I actually think this is happening, whether people realize it or not.
I do not say this happily, as these failed ideas are ones that I myself have held for a long time. But much as the disintegration of the USSR was strong evidence of the failure of communism as an idea, the current serious problems facing the US belie an ideological failure as well.
And yes, the right descriptor is "failure", not "mistake" or "overconfidence". I think to describe the financial crisis as a simply a system failure with multiple causes, while in some senses accurate, is to minimize it and to fail to get to the root of the issue.
The sooner people accept that the underlying ideas failed, not just the people or the rules, the more quickly rational and efective solutions to these problems can be reached. At least so I hope.
I just think that there a lot of idiots in the world, and there were too many in the financial services, greedy idiots (second to worst kind).
That said Governments aren't any better...
Humankind for you, how depressing
Libertarianism is flawed because it's an ideology. All ideologies are flawed. There is no system which will insure the maximum amount of freedom and justice to the maximum number of people. Much less any system which will bring on some sort of utopia.
Ideologies when strictly held are the result of a particular mode of thought taken to excess. The mind always tries to find order and meaning and then simple explanations for complex events. Some people are naturally drawn into habits of thought where everything in the political economy is explained by a certain set of principals. An ideology.
It is not surprising that most of Americas first neo conservatives were often doctrinaire communists and socialists when young. By being such they demonstrated that their thinking was organized in that manner which explained everything through the lens of political ideology. Switching from one ideology to another even opposite one is not a far step at all. For it isn't the principals of any ideology which are important but rather it's the habits or modes of thought which is key. When the entire world is seens as following some simple set of rules then the rules themselves are interchangeable. Any set will do to fullfill the desire to explain everything.
Ideology is the enemy of wisdom. Ultimately all ideologies end up calling upon people to serve a system. Admittedly soft Libertarians like Megan never quite reach the extreme levels of absolutism of the purists.
Classic liberalism is not a classic ideology. Classic liberalism is an operational model which lays down certain principals meant to resolve the differences bewteen competing interests.
Modern self identified liberals support a hodgepodge of often disparate policy ideas which cannot be explained by any simple set of rules. So called Conservatives pretend the overarching principal is supporting government power and spending but that's just a cartoon. Take the domestic spying issues or Pentagon spending.
Yeah. More to the point, you are leery, as usual, of anything that would require your ideologies be altered to accomodate the real world.
Having watched you make similar arguments for years, it is why many of us convulse with laughter when you make testy comments about understanding the nature of statistics.
Megan McArdle's opinions continue to be unbiased by reality! Now THAT's a yawner headline.
SoV, how the fuck do you regulate fear?
U. S. wholesale prices dating back to 1800 show several periods of accumulation followed by periods of over consumption. Because these periods are statistically difficult to measure our outline follows historical events, pinpointing major changes in trend. During periods of relatively cheap prices, assets accumulate. As prices increase, the consumption of assets are necessary to maintain a standard of living. When new production fails to keep up with consumption, due to relatively high prices, the economy begins to decline to another period of cheap prices, and a new growth cycle begins.
All truth passes through three phases. First it it riduculed, then opposed and finally acepted.
As for the tin foil hat's and CRA if you where alive then in 1967 and whatched our city's burn you can see the footprints to trends and not needless self interests of opinion's which blur only.
Earlier a coal miners widow and 2 chidren where on governments desk which started social security and a chicken in every pot and all we fear is fear itself.
Meanwhile Later.
1. We will never again be able to get sufficient growth of the economy to eliminate or even markedly reduced unemployment. NAFTA, GATT, and Clinton's hope of growing the economy to solve unemployment is doomed to failure.
2. The promise of competing in the global economy is a hoax perpetrated upon the working and unemployed people of this country because over time a nation needs to buy and sell overseas in roughly equivalent amounts.
3. All attempts to reduce the deficit, balance the budget or pay off the national debt are futile. The deficit and the national debt represent the subsidy the government has paid in its attempt to keep growth and unemployment at the level of social tolerance.
4. The steady state economy into which we are being inexorably forced implies an interest rate of zero.
5. An interest rate of zero (as Hubbert explains) means the end of the money system. We are being forced to completely rethink our cultural ideas about how to organize our economy and distribute purchasing power.
6. Increasingly desperate means will be used by those who think we can continue to have business as usual. Freedom is more of a burden and an obligation than an option or a right.
To divorce political or social rights from moral obligations perverts and corrupts freedom. Christ himself teaches us “Render unto Caesar what is Caesar’s”—not because every Caesar deserves it, but because Caesar’s concern is not with the most important thing in our lives
While each Wall Street crisis is unique, human nature remains constant. It is often said that there are only two emotions on Wall Street, greed and fear, and that when the mood changes suddenly from the former to the latter the result is panic. There were major panics on Wall Street in 1792, 1819, 1836, 1857, 1873, 1893, 1907, 1929, 1987, and now 2008.
Much like the 2008 meltdown, the 1836 crisis occurred after a huge real estate crash.
In each case, Wall Street forgot that the laws of economics are as ineluctable as Newton’s law of universal gravity. (It seems politicians will never learn this.) Prices do not rise forever, risk must always equal reward, and supply and demand must balance each other over the long term. Our current crisis emerged after Wall Street acted as though housing prices would continue rising inexorably, and after the government-backed housing giants Fannie Mae and Freddie Mac created trillions of dollars worth of an economic oxymoron: a high-yield, no-risk investment called mortgage-backed securities.
"Libertarianism is dead" NOT
"The sooner people accept that the underlying ideas failed, not just the people or the rules, the more quickly rational and efective solutions to these problems can be reached."
Comments like these are why it's important to really sort out what happened here. Which underlying ideas failed?
One of them was Barney Frank's idea that we should 'roll the dice' so that more low income people could get mortgages. Owning a home is risky, and it's not clear that we're helping people by pushing them to buy a home regardless of whether they can afford it. Those old lending standards (20% down, the old LTVs, etc.) need to be brought back and enforced.
In the financial markets, we need more transparency. There was such hysterical fear over the CDS (credit default swap) market, because people didn't know who had what or how much of it was netted or hedged. As far as we've been able to tell so far, these risk management tools were being used responsibly, yet they led to problems because no one knew what to expect or who was vulnerable, so they didn't want to trade with anyone. Plus, as Megan pointed out, there were automated requirements that any downgrade triggered all sorts of problems. We need regulations that encourage people to follow good practices without abruptly cutting off all activity at the first sign of trouble.
The answer isn't to simply get rid of all these 'complicated derivatives'. Look at the unwinding of the CDS's for Lehman - the CDS's got hit with a huge proportional payout (more than 90 cents per dollar) on what had until relatively recently seemed to be a solid company. The deadline for paying claims was last Tuesday, and there don't seem to have been any defaults. There were about $400 billion in CDS on only $150 billion in Lehman bonds, which is part of what made people so hysterical, but the latest estimate is that the net exposure was only $5.2 billion, and it all paid off smoothly.
There may be more revelations later, but it seems that the problem is not the new tools, which can be very useful, it was the lack of transparency.
These people waving their hands and blaming it all on free markets and laissez-faire attitudes need to be more specific. It's clear how lowering mortgage standards contributed to this mess. The lower lending standards helped to trigger the bubble, and the fact that there were so many bad loans spread through the system made it much, much worse when the bubble popped.
Those of you blaming 'deregulation' and 'free markets' need to be specific about what should have been done and why it would help. Simply proclaiming an ideology to be dead doesn't contribute to the debate.
It would be interesting to see, however, how much of the problem was caused by the relaxed lending standards themselves and how much was caused by widespread violation of even the relaxed lending standards. I have seen and heard numreous investigative reports featuring whistleblowers and insiders that loan verifiers were overriden, were fired for red flagging applications, appraisals were knowingly inflated, etc. The relaxation of the standards to encourage ownership were never intended to remove all standards -- that was done by greedy, overconfident businesses confident that enforcement wouldn't happen. It seems that to the extent this was a driver, the policy itself was not necessarily at fault.
Weisberg's "Libertarianism is Dead" is a good example of the wish being father to the thought. As there ever been any time in history, in hard times or prosperous ones, that the State-shtuppers didn't want us pro-freedom folks to just shut up and go away--preferably for good?
Probably the first Pharoah told the Egyptians, "Look, this freedom business may have been acceptable when we were cavemen, but now you need the strong hand of a divine being to keep you out of trouble--and that hand is me!" Weisberg would have been there as the Pharoah's "Dathan," saying, "Nyaaahh, you mugs, look what all that talk of 'individual liberty' got you! Where's yer precious freedom nowwwwwww?"
Because not everyone who has the Stockholm Syndrome is Swedish.
Megan,
Your comments were brilliant. It's very important to keep pointing out that regulation has risks, too, as we are about to head into an era of regulation-for-the-hell-of-it, constructed by Congressmen and Senators who are utterly clueless about what happened and why. Some of them even believe, like some of your readers above, that the current systemic crisis arises principally from criminal violations of the securities laws. While there were undoubtedly some such violations (and let's not forget Sen. Dodd's criminal failure to disclose the below market mortgages Countrywide gave him as a thank you for protecting Fannie and Freddie from tighter regulation), it's obvious to anyone with an IQ above the melting point that such crimes were not the fundmanental cause of the current crisis.
Your comment about free markets not existing in a state of nature was right on, too. I loved this: "There is no libertarian state of nature in which human beings survived without some form of coercively enforced rules. All libertarianism can do is maximize the scope for individual action within that framework." Those are wise words that bear repeating.
Brilliant and clear.
Thanks from an economics novice.
For two centuries, the U.S. economic system has served as the model for much of the rest of the world. But, like many institutions and individuals who have enjoyed great success, the United States has allowed itself to get fat and lazy and to drink from the poison chalice of claims that government is the solution rather than the problem. Many other people who had experienced full socialism and communism understand the dangers of too much government more than all too many Americans.
"Just where were all the risk-management experts who should have assessed the pitfalls these companies faced, and how could they have missed the massive risks that are now threatening to take this entire sector down?"
The character of a people is as much made by the institutions as the institutions are made by the character of the people.You can foresee the time when the Congress and the Senate in the United States will similarly be engaged in local matters but nothing major, nothing continental and certainly nothing global and that is gradualism’s testimony of current reality. It is the set of institutions which now prevails which creates the new attitudes which are so inimitable to prosper such as Sweden and Switzerland which have escaped the damages of two wars and have become repositories of a large part of the capital of Europe. In Switzerland, there is still some traditional instinct against government interference. Switzerland is a marvelous example where, when the politicians become too progressive, the people hold a referendum and promptly say, "No!" The German prosperity is due, to a very high degree, to the reasonableness of the German trade-union leaders which, in turn, was due to their experience with inflation. My argument really is that we know so much detail about economics; our task is to put our knowledge in order. We hardly need any new information. Our great difficulty is digesting what we already know. We don’t get much wiser by statistic information except in gaining information about the specific situation at the moment. No, only further impoverishment awaits the Anglo-American free-market masses. Favela living, it's not only for Brazilians anymore. Looking at American households alone, in 1978 their total debt came to 79% of total employee compensation (wages, salaries, pension contributions, etc.). Today, this figure has more than doubled to 174%. The government is not the solution to our problem, government is the problem. Relative to the size of the economy, that deficit was equal to 3.1 percent of gross domestic product, up from 1.2 percent in 2007. (The average deficit over the preceding five years, 2002-2006, was 2.6 percent of GDP.) The $438 billion figure is about $31 billion more than the $407 billion deficit CBO projected this summer, primarily because revenues are lower than we anticipated and spending for defense and deposit insurance is turning out to be higher.
CBO estimates that receipts in 2008 were about $44 billion (or 1.7 percent) below receipts in 2007, falling from 18.8 percent of GDP in 2007 to about 17.7 percent of GDP in 2008. Corporate income taxes declined the most, falling by about $65 billion (18 percent), due largely to weakness in corporate earnings throughout the fiscal year.
The masses, the hosts of common men, do not conceive any ideas, sound or unsound. They only choose between the ideologies developed by the intellectual leaders of mankind. But their choice is final and determines the course of events. If they prefer bad doctrines, nothing can prevent disaster.
Ann is correct. "Simply proclaiming an ideology to be dead doesn't contribute to the debate."
Consequently, we’ll leave you with this thought from Cicero in 55 B.C.:
“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”
McArdle is always careful to conceal the selfishness that is at the core of the Ayn Rand world view. It is this selfishness and the resultant systemic dishonesty that has crashed the financial markets. The reason McArdle clings to her badly dented Libertarian credo is that she can't alter her fundamentally selfish character. Thus there is no sophistry too arduous for her to undertake to defend the goodness of institutionalized selfishness and greed.
rapier - who are you? Your 7:29 post was one of the most brilliant comments I've ever read.
Wow.
"The farther I go into this crisis, the more leery I am of any neat narrative explanation of financial panics--or indeed, many other rare phenomena. More on this later. For now, a parting thought: in complex systems, there can be no such thing as an individual villain."
I think the mistake that too many people make (as a doctrinaire libertarian) is that bad things can be prevented from happening, and that innocent people can be saved from the mistakes that are made by people they trust to do things for them.
What so much of this banking regulation has caused in my mind, is an atmosphere of, "we all do well together, and we all fail together". You pointed out several regulations that prove this. So many things were tied together through regulation that it forced a domino effect.
Removing some of these regulations wouldn't prevent bad things from happening. However, it would limit their scope, and their overall effect on the economy. In fact, I'm willing to bet good money that smaller failures would happen more often than they do now.
However, I think it's more healthy to have smaller booms and bussts of less scope more often, than grand bubbles and system failures that we have now.
HH - Just out of curiousity, what would you do about the natural selfishness of people? It seems to me that people are greedy. They want stuff for themselves and their families. So what? Do you think there is any way that society can be organized to eliminate selfishness, to make people less greedy? To make people altruistic and want to act in the best interest of other people?
BHH's says "selfish" like it's a bad thing. As Nathaniel Branden once said, every breath you take is a selfish act. Only with people like HH, they not only want to breathe, they want to take breathe some of your oxygen, too. But, you know, only for the common good. For me, being pro-freedom is selfish. I need liberty the way any rational being needs oxygen. And if anyone has ever made a logical case for their right to stifle me, I haven't heard it.
But I want to hear more, HH--which "selfish" act or institution caused the current crisis. The State's meddling in subprime loans? Its involvement in Fannie Mae or Freddie Mac? The Federal Reserve Syastem. Yeah, sounds like a regular Galt's Gulch.
>>
HH - Just out of curiousity, what would you do about the natural selfishness of people? It seems to me that people are greedy. They want stuff for themselves and their families. So what? Do you think there is any way that society can be organized to eliminate selfishness, to make people less greedy? To make people altruistic and want to act in the best interest of other people?
For millenia, people have gathered regularly to be told how to behave better. The religious, spiritual, and political leaders who urged their followers to exhibit sobriety, thrift, forgiveness, kindness, and generosity were honored and respected. The selfish kept quiet and practiced their vice unobtrusively.
Ayn Rand freed people like Greenspan and McArdle to listen to their inner selfish beast. She persuaded them that when everyone acts like a selfish animal, society gets fabulously rich and happy. How has that worked out for us?
which "selfish" act or institution caused the current crisis.
The managers of the debt rating agencies deliberately altered their rating policies to misrepresent the risk of junk securities so as to earn bigger fees and higher bonuses.
Sellers of mortgages deliberately lent money to people who were not credit worthy to earn more commissions.
Bundlers of mortgages deliberately packaged junk mortgages to make more bundles to earn more fees and get bigger bonuses.
When "everybody is doing it" and everyone agrees that "greed is good" selfishness becomes a contagious plague. We see the results all around us in the ruins of Wall Street. Do you like what you see?
I saw yesterday that the price of oil dropped to below $70, down from a high of $147 earlier this year. Some think this is due to a stronger dollar, with more buying power, and a drop in demand due to the high cost of oil.
More evidence I guess that libertarians are wrong about the corrective forces of markets.
What we really need is a giant government sponsored entity, lets call it a GSE, to buy up oil and under political pressure have them resell oil to people with bad or no credit. Then when they default and the GSE goes bankrupt we can bail them out, and say the free market didn't work.
Just a quibble here. There is no way that mark-to-market accounting should be blamed. I don't think that you're saying that mark-to-market is at fault, but you also are saying that mark-to-market caused the downgrades. What caused the downgrades were a deterioration in creditworthiness -- the value of marks to market were merely one of many factors that ratings agencies considered.
A strong argument could be made if the banks and other financial institutions were adequately capitalized to begin with, they would not have suffered from the ratings downgrades described. Further, it seems that a strong argument could be made that marking to market on a daily basis _strengthens_ a firm because the firm is constantly forced to evaluate and react to market exposures and risk. See, for example, this recent Bloomberg article on Goldman (in particular the section under "Risk Committee"). http://www.bloomberg.com/apps/news?pid=20601109&sid=aA_lSAQLywYs
"The farther I go into this crisis, the more leery I am of any neat narrative explanation of financial panics--or indeed, many other rare phenomena."
Well, get ready for the narrative, like it or not. You will find out that the true villain here is the smallest, weakest, most defenseless link in the food chain. Already, the ideologues have tried to dump this colossal market failure on backs of poor minority homeowners. That's not really playing because too many foreclosures are happening to middle-class borrowers.
My guess is that the final master narrative out of Wall Street is that this was all the fault of those all-powerful rating agencies.
"You're saying they are all guilty of fraud (or at least "dishonesty"), merely for buying or selling these particular securities?
Yes, though perhaps not in a criminal sense. Others have called "the triumph of data over common sense." Claims were made about the safety of these investments, which were backed up by models that vastly underestimated risks, and (because each stop along the chain was making money) nobody (e.g. executives whose firms were making huge profits) bothered really look into the soundness of these securities.
There are a few terms that come to mind:
fraud: a deception made for personal gain
negligence: action that falls short of what a reasonable person would do to protect another individual from a foreseeable risks of harm
All,
Libertarianism is a wholly unreal aspiration. As such, it is a less attractive cousin of non-violent anarchism. However, what libertarianism offers, and anarchism does not, is an excellent structured critique of many of our imperfect institutions and ways of thinking. Therefore, let there be libertarians henceforth and for the conceivable future.
A defect of libertarianism, and of anti-libertarianism, is that they seem to breed a state of mind which sees wicked conspiracy everywhere. Now wicked conspiracy, individual villainy and grossly villainous acts are not endangered species; but they have nothing like the destructive power of our tendencies towards Gadarene, lemming-like perversions of herd behaviour.
For the record, regulatory actions which were possible, which could have averted the financial crisis (though not the recession)and which should have been taken were:
- To insist from about 2000-2002 that regulated banks make general provision for losses against the possibility/probability that these losses would materialise when house prices declined to historically normal levels relative to incomes.
- To insist that regulated financial institutions make appropriate capital provision in setting up "off-balance-sheet" entities.
- To bar the process of passing on risk on loans without regard for the underlying quality of lending; e.g. by insisting that when a loan is securitised part of the risk remains with the originating bank.
How do we know that these particular measures would have worked? They did work in one economy with a major house price bubble, a fragile financial system and without even the power to set its own monetary policy - Spain.
These measures were well within the combined powers of the Fed and the SEC (or of the Bank of England plus the FSA in Britain). What went wrong was that regulatory powers were not used, not that they did not exist.
All that is as unarguable as most history - it needs probing but the main lines of the analysis look robust. Why did we not do as the Spaniards did? My guess is that we were fixated on the evident likelihood that for a financial system in equilbrium, it will be more efficient to operate with few regulations than with more. So fixated that we forgot the historical lesson that all financial systems have veered to sharp disequibrium from time to time. If that is what happened, the scattering of libertarians applauding our fixation was imperceptible amongst the trampling herd. We done it; they was merely in favour.
Tail End Charlie
No. Think of it as a glass quarter full:
'Humankind for you; slow learners, but learners.'
tc125231 and others
Megan's ideological stance is and always was inalterable. That is why she is now a registered Democrat.
aaron
You regulate fear by making your regulatory actions inteligible as aids to stability. E.g., you avoid Paulson's original $700 billion package.
I agree with what I think Megan is saying, but in a way it's surprisingly poorly worded. My take is that Megan is rejecting attempts to pin the problem on any one favored villain of either the left of the right. She means to say there are many villains, not none. Knee-jerk cries of freer markets or more regulation are just ideology, not solutions.
I also don't recommend a Libertarian approach to nuclear reactor design, or nuclear waste treatment and disposal.
As someone who leans (small-l) libertarian, there's a fair bit of truth to this statement. Libertarian principles don't guarantee success - in fact they explicitly allow for and expect failure.
Where those principles cease to apply is when the cost of failure exceeds society's willingness to endure it. The current financial crisis "disproves" libertarianism not because of the bank failures (businesses and even industries fail all the time), but because the impact of those failures is simply so large that our society is not willing to let it occur. Once you insulate the actors from the costs of failure, moral hazard looms large and libertarianism becomes a very bad, even hazardous, basis on which to work from.
All that said, nobody has provided a convincing argument that the current crisis is solely due to deregulation. After all, it's hardly like finance lacks for regulations, nor were Fannie and Freddie free market players. I don't claim to understand all the details of the failure, but it seems more like California's energy deregulation - parts of the market were de-/under-regulated, while other parts of the same market were highly regulated. The end result should be a surprise to one; people were able to game the system.
But that's not intended to be an argument for a full deregulation of the financial industry either. We are now bailing them out after all. But I'd like to see the coming round of regulations work on trying to regulate away "too big to fail" as opposed to trying to regulate away the possibility of failure itself.
Here's why I have problems with the Libertarian Arguments about the US Economy:
Sometimes this is true--the interstate trucking market has been indisputably improved by deregulation.
The interstate trucking market is regulated as to size,weight, number of hours a driver can drive, how fast you can drive, where you can drive, the driver has to be licensed, has to carry logbooks, and the entire infrastructure of roads is heavily subsidized.
It wasn't de- regulation, it was changing the regulatory scheme.
Total free markets gets you Lagos or Albania. I am glad to see that the basic thrust of this piece was about rational regulation, but the basic principle applies- markets need regulation and oversight for stability. Always.
Bush, the worst president? Come, come. If he were really that bad the Democrats would have impeached him. Bad as he was you have to consider: Wilson got us into an unprovoked war, had 1/4 M spies looking for dissidents, abrogated the constitution, plus was racist. JFK/Johnson started Vietnam plus tore up black families and presided over the largest increase in crime. FDR put minorities in concentration camps (to take their land) and gave us the military-industrial complex while fumbling the economy for a decade. If you want to get mad at someone get mad at the media who picked Bush and then gave us Kerry(or Gore)and said: "Pick one." He was just, sequentially, the lesser of two evils
"For example, for thirty-five years, the memory of the 1929 crash was seared into the brains of the public consciousness, and the market remained relatively down to earth. Then the generational memories faded, and you got the late-sixties bubble that led into a decade-long stagnation."
You ought to take a few minutes to click through this PDF by Vitaliy Katsenelson. One key point he makes is that, historically, secular bull markets in stocks have been followed by secular 'range-bound' or bear markets of similar length. The primary driver of these range-bound or bear markets is multiple compression: companies can continue to grow earnings, but as investors get fed up with stocks, the stocks gradually start trading at lower multiples. For example, by the end of the secular range-bound market that started in the Great Depression, in 1950, the S&P traded at 7x times its trailing year's earnings.
HH said: "Ayn Rand freed people like Greenspan and McArdle to listen to their inner selfish beast. She persuaded them that when everyone acts like a selfish animal, society gets fabulously rich and happy."
At the risk of feeding a troll, I do want to thank HH for allowing me the opportunity to observe him eagerly display his abject ignorance.
Much obliged, HH.
"Already, the ideologues have tried to dump this colossal market failure on backs of poor minority homeowners."
Nonsense, the people being blamed are fat-cat politicians like Barney Frank and Chris Dodd that raked in big campaign contributions and bribes for their districts in exchange for weakening lending standards and refusing to regulate Fannie and Freddie.
Ron, negligence makes perfect sense for the Wall Street buyers and sellers of MBS's. And surely some of them were also dishonest. But HH--who is very fond of yapping about dishonesty in the service of greed--has done a poor job of identifying actual dishonest (as opposed to negligent) players. I suspect, though I cannot prove, that this is because much of the dishonesty was low on the food chain (borrowers, brokers) and at the top end, it was mostly negligence.
For millenia, people have gathered regularly to be told how to behave better. The religious, spiritual, and political leaders who urged their followers to exhibit sobriety, thrift, forgiveness, kindness, and generosity were honored and respected.
"Honoured" and "respected" are not the same words as "obeyed".
There were also ample religious and political leaders who, in urging their followers to exhibit sobriety, thrift, etc, were clearly saying "do as I say, not as I do". Medieval popes' and monks' luxurious lifestyles prompted many reform attempts, and kings were notoriously in debt, and extremely fond of cutting off people's heads. I don't think that Henry VIII for example could be described as someone big on kindness or forgiveness.
The selfish kept quiet and practiced their vice unobtrusively.
No they didn't. They built whopping big palaces for themselves, wore rich clothes and flashy jewellery, employed masses of servants, carriages with livery, went on big processions if they had to go somewhere, etc. Go and visit Europe sometime - people have been showing off their wealth for centuries. And it wasn't just the idle rich either, governments would pass sumpatory laws to try to stop merchants from dressing and looking like the nobility.
Ayn Rand freed people like Greenspan and McArdle to listen to their inner selfish beast. She persuaded them that when everyone acts like a selfish animal, society gets fabulously rich and happy. How has that worked out for us?
Your timing is wrong. It was Adam Smith who pointed out that wealth comes from people pursuing their self-interest. As for society at the moment, if you live in a Western country then you live in a country where people are far richer than 100 years ago, and we have longer lives and less wars. We may be heading into a rough recession, but there were ample recessions long before Ayn Rand ever picked up a pencil. Global warming is a threat, but the communist countries contributed en mass to CO2 emissions. Adam Smith's claims that in a system of good property rights, wealth is created by people pursuing their self-interest strike me as working out pretty darn well for us.
HH--who is very fond of yapping about dishonesty in the service of greed--has done a poor job of identifying actual dishonest (as opposed to negligent) players
Excuse me for not leading the FBI to specific places of business and guilty individuals. In congressional hearings this week, the public saw message transcripts of junior employees in the bond rating agencies openly acknowledging that the ratings were bogus. How much plainer does dishonesty have to get for you to recognize it?
Oct. 22 (Bloomberg) -- Employees at Moody's Investors Service and Standard & Poor's privately questioned the value of some mortgage-backed securities that were given creditworthy ratings, saying they created a ``monster,'' according to e-mails released by a U.S. House panel.
``Let's hope we are all wealthy and retired by the time this house of cards falters,'' one e-mail from an S&P employee said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_GhN6Ihrky0&refer=home
Adam Smith's claims that in a system of good property rights, wealth is created by people pursuing their self-interest strike me as working out pretty darn well for us.
Smith never, in his wildest imagination, could conceive of capitalism destroying the ecological balance of the Earth, but that is where crude adherence to his principles has brought us. It is the accumulated "externalities" of organized selfishness that are biting back.
The mining company makes its profits, goes bankrupt, and leaves a toxic desert behind. The Wall Street trader packages his toxic securities, earns his fortune, and retires, leaving millions of retirees impoverished. The Devil takes the hindmost, until the hindmost organize and go after the servants of the Devil.
Ann and Rob Lyman have provided perhaps the most sane, rational, and even-keeled arguments I have seen in the comments sections.
HH, Jon, John, zeitgeist, etc. all of you attacking Megan and Wall Street greed and the laissez-faire zeitgeist of the Bush years, could you explain how MBS's were structured? Why the banks who were engaged in securitization got into trouble? Can you explain Waterfall Provisions? Could you explain the credit ratings process? Could you explain how collateral is posted in the CDS market? How about where Lehman CDS was trading the week before default? And how about what an SPV is and its role in the crisis?
Before you can explain those things, you can't begin to start pointing fingers at the problems on Wall Street, because you just have no clue. I can answer all of those questions with great amount of detail, and I still don't exactly know who deserves the bulk of the blame. As best as I can tell, the answer is "everybody."
The question of which regulations we would have needed, I am not sure the answer to. For example, Felix Salmon wrote about a month or so ago how Spain's heavy regulation of its banks (for example, banning off-balance sheet entities like Special Purpose Vehicles) kept Spanish banks strong and banks like Santander are doing well. True, Santander is doing well due to its enormous world-wide deposit base. But it too needs recapitalization. And Spain had a huge real estate bubble and was heavy into securitization.
Recently, WaPo ran an article about how Canadian banks have avoided the problems seen here because the industry is more regulated (though they use "regulation" in a more interesting way, even when it referred to such things as no interest write-offs on mortgages from one's taxes). But I recently looked at a paper by Jarrow and Turnbull that showed that CIBC, one Canada's largest banks, had to write down something like 5 billion USD. We just all forget, because it happened months ago. Other banks like BMO (Bank of Montreal) are traditionally super conservative and didn't enter the market not because of regulations but because they had restraint and have always avoided anything exotic. I once heard before this all started that RBC (Royal Bank of Canada) apparently, had gotten rid of its entire structured credit trading operation years ago (though it still has prop desks that do it) because they lost a gajillion dollars back then. Even Mizuho (a Japanese bank, for godsakes!!!) had to write down a couple of billion on this stuff.
So please, point out which regulatory regime we should or should not have been in. Because apparently, no one in the entire world, not even such laissez-faire havens like Denmark, Germany, UK, France, Italy, Iceland, Australia, Canada, or Spain have figured it out. We await for the geniuses to respond.
HH --
Yes, one email from one S&P employee proves everything! Taking emails, meant to entertain your fellow workers or be sarcastic, out of context and using it for your own ideological purposes is, in my opinion, beyond the pale here.
You know, there's constant arguments about quantitative methodologies at banks and credit agencies. Constant. And sometimes people who were pointing out problems turn out to be right and people start listening to them. Other times, they were right, but the wrong view was good enough that losses didn't turn out to be harmful, so no one listens. But we can't criminalize being wrong. Otherwise, no one will attempt to make statements. Just because some people were wrong doesn't mean that they engaged in fraud.
So please, point out which regulatory regime we should or should not have been in. Because apparently, no one in the entire world, not even such laissez-faire havens like Denmark, Germany, UK, France, Italy, Iceland, Australia, Canada, or Spain have figured it out. We await for the geniuses to respond.
First you point out that countries that avoided most of the casino investments did not suffer as much as the US, then you claim that there is no difference among the benefits of the various regulatory regimes. The central difficulty in the US is that the business community effectively undermined regulation by gaining control of key politicians (of both parties). This was done through legal bribery.
Please note that not one person has gone to jail for what is the largest financial debacle in the last 50 years. This is the perfect crime: too big to jail.
But we can't criminalize being wrong.
No, but we sure as hell can criminalize a materially false representation of the creditworthiness of a security.
It wasn't just one email. The heads of the ratings agencies themselves said that their models were "wrong." But the funny thing is that the "mistakes" always favored the agencies making more money.
There is a term for this phenomenon of everyone looking the other way: generalized corruption. It used to be found only in third-world kleptocracies. Bush brought it to America.
the public saw message transcripts of junior employees in the bond rating agencies openly acknowledging that the ratings were bogus. How much plainer does dishonesty have to get for you to recognize it?
A couple of things: First, dishonesty is different from stupidity, and stupidity is far more common than we like to imagine. It's possible that the junior employees disagreed with the ratings models, but that doesn't make the ratings models the product of deception. Second, we don't have dates on most of the emails in the Bloomberg article; they could have been written too late to make a difference.
I'm not saying there are no villains, and indeed the ratings agencies are probably quite culpable. I'm saying that to blame it all on dishonesty in the service of greed requires identifying actual, as opposed to merely hypothesized, dishonesty.
I'd also suggest that stupidity is far more common than cleverness.
Please note that not one person has gone to jail for what is the largest financial debacle in the last 50 years.
If a crime can be proven--something that you have asserted repeatedly but not even attempted to demonstrate--it will take a year or more to pull the evidence together for an indictment, and of course, there are those of us who favor trials before incarceration.
No, but we sure as hell can criminalize a materially false representation of the creditworthiness of a security.
Only if you can show it was knowingly false rather than erroneously so.
Diversity's comment was good too.
http://www.talkingpointsmemo.com/news/2008/10/greenspan_says_flaw_in_market_1.php
"Greenspan also grudgingly called for tighter regulation of the finance industry."
Hehe. What a moron! the hero of libertarians is nothing but an intellectually challanged retard.
"Mr. Greenspan said he had made a "mistake" in believing that banks in operating in their self-interest would be sufficient to protect their shareholders and the equity in their institutions. Mr. Greenspan said that he had found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works."Mr. Greenspan, who headed the nation's central bank for 18.5 years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a "state of shocked disbelief."
Bye bye liberatarianims! your death is giving us immense pleasure and joy.
Please note that not one person has gone to jail for what is the largest financial debacle in the last 50 years. This is the perfect crime: too big to jail.
Interesting form of argument: Assertion, assertion, assertion. Does evidence fit in at any point?
For example, maybe you could identify who was engaged in actual criminal activity and what they did to merit jail time, but didn't get it. Perhaps you could also show how, in the span of the intervening month since the "largest financial debacle in 50 years" began to unroll, the justice system has been given sufficient time to single out these people, investigate their activities, and then apply trial accordingly.
Only if you can show it was knowingly false rather than erroneously so.
Angelo Mozilo belongs in jail for deliberately signing people up for mortgages that they could not pay. Instead, he earned $400 million at Countrywide. This is a textbook case of what is wrong with America: legalized dishonesty.
Quite an uproar over an essentially empty article. Ponnuru put it pretty well over at NR:
"Nor will readers familiar with his work be surprised to see that there is a hole right in the middle of his article—right where its central argument ought to be. Libertarians, he notes, say that various misguided government interventions played a big role in the financial crisis. He then writes, "There are rebuttals to these claims and rejoinders to the rebuttals. But to summarize, the libertarian apologetics fall wildly short of providing any convincing explanation for what went wrong." Well, if Jacob Weisberg says so then it must be true. To summarize, Weisberg has assumed the truth of the central proposition he is trying to prove. It certainly makes his job easier."
http://corner.nationalreview.com/post/?q=OGQ5OTIyYWMyNGIxMmRkZTdlMjQxZTA0ZGY4OGQwZjc=
@HH - "capitalism destroying the ecological balance of the Earth"
LOL
The "ecological balance" of the earth is in no danger of being destroyed by capitalism or any other political philosphy. To speak otherwise is nothing short of hyperbole and serves no purpose but stirring emotional responses.
The planet has little to fear from the human race and to believe otherwise is to elevate humanity to a status that rivals the ancient Sumerian gods.
It is unfortunate that the environmental movement has lowered itself to the level of religion.
"The next catastrophe is just around the corner if we don't repent of our evil ways." A motto of those looking to control others and get rich.
The mantra is repeated constantly until it's believed by those too ignorant to research and understand simple concepts of physical science, whereupon they're duped into believing they're saving the planet when all they're really doing is lining the pockets of the rich they claim to hate.
What's worse is that they're not just lining the rich man's pockets with their own money - No, they're voting and using the force of government to do it with everyone else's money as well.
It's pathetic to think that 40% of the US gross domestic product - that's FORTY PERCENT of every dollar earned - funds some function of government.
Next victim - Health care. That'll push us over the fifty percent mark easily. And for what?
Not sure if you've ever dealt with the idiots over at DFACS or the DMV or the Unemployment Office or whatever you have in your state, but those are the LAST people I want in charge of my health care.
But hey, what do I know? I'm just a selfish bastard who believes that he knows better than HH or anyone else how to spend his own money. That *he* earned. With *his* work.
Unfortunately, to most people I'm an unpleasant anachronism soon to be relegated to the back halls and basements of the museums of humanity.
Whatever.
Angelo Mozilo belongs in jail for deliberately signing people up for mortgages that they could not pay.
I presume you are prepared to identify a section of the US Code which this violates?
This is a textbook case of what is wrong with America: legalized dishonesty.
Again, I will ask, what did he do that was *dishonest*, rather than merely stupid? I, for instance, had a Countrywide NINA from 2003-2008, which I paid on time every month. Now, I thought the practice of writing NINA loans was kind of nuts, but I was glad to have it. Should he go to jail for giving that to me?
what did he do that was *dishonest*, rather than merely stupid?
Mozilo represented to his stockholders that Countrywide had a stable and sound business model, when he knew that he was taking on a huge amount of risk. Mozilo also knew that his sales force was signing up tens of thousands of people for mortgages that they could not afford.
You don't seem to be acquainted with the concept of deceptive business practices. You can cheat people while not breaking any laws. Mozilo earned $400 million doing exactly that.
The "ecological balance" of the earth is in no danger of being destroyed by capitalism
How very reassuring. Presumably this means that many animal species are not being hunted to extinction; that there is no threat of a catastrophic increase in average planetary temperature; that population growth will not cause vast famines; and that deforestation will not destabilize vast regions of the Earth.
Once the Chinese each have two automobiles and we pave over the Amazon rain forest, we can all move to another planet with breathable air.
So, Joe and HH, bottom-line it for us: what specifically is it about being in favor of freedom that bothers you most? And how much freedom would you like to take away? And by what right? Specifics, please.
And how much freedom would you like to take away? And by what right? Specifics, please.
1. The freedom to enrich yourself by cheating the poor and ignorant.
2. The freedom to pocket millions in compensation after leaving a company wrecked and bankrupt.
3. The freedom to buy politicians to remove any interference with crooked business practices.
4. The freedom to silence critics and whistleblowers through workplace intimidation.
5. The freedom to declare that greed is good without fear of contradiction.
"Ayn Rand freed people . . .to listen to their inner selfish beast. . ."
Ah, yes, the statist as Puritan scold. The dark suspicion (as William Buckley, paraphrasing Mencken, onmce wrote of Ralph Nader) "that somewhere, someone is making a profit." Self-interest as Original Sin.
Or as David Friedman wrote: "Selfish capitalists make money. Virtuous 'liberals' steal it."
Maybe HH should change his monicker to "Savarnarola."
Really not what I meant by "specifics," Savar-- I mean, "HH"--but that was about the answer I was expecting.
Ah, yes, the statist as Puritan scold.
One capitalist invents a chip that allows computers to be sold inexpensively. Another capitalist increases the size of a box of children's candy while reducing the volume of the contents. Both have earned a profit. Is it all the same to you?
Evolution has allowed both altruists and predators to survive in the human species, because each trait confers advantage in fat and lean times. Some of the predators call themselves "Libertarians."
Wow, you gotta hand it to HH--he doesn't try to hide his love of the Mailed Fist. I just read his post where he says something like, "For centuries people have gathered to be told what to do. . . " And he apparently thinks that's a good thing! Which are you, HH: the one who likes to tell people what to do, or the one who likes to be told what to do? Lord or serf? Hammer or anvil? Sadist or masochist? The answer should be illuminating.
In the example you give, HH, if neither uses force or fraud, neither is a predator. That is, if the manufacturer wants to increase the size of a box of candy and reduce the amount of candy, it's his box and it's his candy. As long as he isn't saying, "A pound of candy inside each box," and selling, say, a half a pound--or forcing people to buy his candy at gun-point, the way you would do if it were for "the common good"--I don't see how he's a predator. "Predator" is a word I reserve for people who like to threaten people with force and steal their stuff. You know, like terrorists, bandits, socialists--scum like that. Would you force Willie Wonka to make his boxes of candy to your specifications? And if so, pray tell--where does your right to do so come from?
@HH
What it means is that the earth acts to protect itself. The earth maintains its own balance. It did so long before homo sapiens found it's way into existence and it will continue to do so long after we've all returned to dust.
As I said - to believe otherwise, or to believe we are capable of destroying the planet is to elevate us far beyond our physical or intellectual capacity.
So a species gets hunted to extinction...who cares? The earth will fix the imbalance. In fact, that the species in question is *able* to be hunted to extinction says that it has likely run its course as far as the ecosystem is concerned.
Population growth? Famine? LOL
The population is self-regulating. If at any point there are too many people in an area to be fed by the supply of food, some of them will die. Eventually balance will be restored.
That's one of the laws of nature and it applies equally to all creatures on the planet. Someone as environmentally knowledgeable as yourself should already be aware of this.
As for the Amazon rain forest, please...
As a quick exercise, tell us by percentage how much of the Amazon rain forest hasn't been *seen* by the eyes of modern man - And don't be a smart-ass I don't mean from the air.
The number will astound you. It astounded me and I was never a "true believer" in the first place. With that much of the rainforest completely unexplored by man - How the hell can anyone say it's being "mowed down" or "paved over"? You can't. It simply isn't true.
Same-old-same-old.
And I bet you can't stand bible-thumping christians.
Don't worry - I don't like them either. Problem is I don't see the difference between them and you.
With that much of the rainforest completely unexplored by man - How the hell can anyone say it's being "mowed down" or "paved over"? You can't. It simply isn't true.
>>
Brazil announces record rate of Amazon deforestation
Posted Thu Jan 24, 2008 5:48pm AEDT
Brazil's Government has announced a record rate of deforestation in the Amazon, months after celebrating its success in achieving a reduction.
During the last five months of 2007, more than 3,000 square kilometres were lost.
Brazilian Environment Minister Marina Silva says the level of deforestation is unprecedented for the time of year and extremely worrying.
She says the rise in the price of commodities, such as soya, could have influenced the rate of forest clearing, as more and more farmers saw the Amazon as a source of cheap land.
http://www.abc.net.au/news/stories/2008/01/24/2146057.htm
@HH
>1. The freedom to enrich yourself by cheating the poor and ignorant.
So cheating the rich is okay? LOL. Define "cheating"? If I give someone a contract, written in their native language, that clearly spells out the terms and conditions of a loan, and they sign it without telling me they're illiterate or don't have the income to pay back the loan, did I cheat them?
>2. The freedom to pocket millions in compensation after leaving a company wrecked and bankrupt.
So how much is it okay for me to make? If I'm a well-known businessman, and I take on a company knowing they're in dire straits and that it's likely I could have my name sullied or even ruined in the process, is it wrong for me to seek guaranteed compensation in direct proportion to that risk?
>3. The freedom to buy politicians to remove any interference with crooked business practices.
Want to fix this? End government regulation of industry and business. Government regulations are a gateway to doing business and payments to politicians via PACs and lobbyists are a result of that. If you want to do business you have to grease the wheels. That power comes from the power to regulate. Take it away and businesses would no longer have to "buy" politicians.
>4. The freedom to silence critics and whistleblowers through workplace intimidation.
LOL - If my job is that screwed up, I'm quitting and *then* blowing the whistle. Why would I want to keep working there?
>5. The freedom to declare that greed is good without fear of contradiction.
Greed is fantastic. Greed is perhaps the best thing we have going for us as humans. Greed is what keeps some scientists looking for the cure to cancer while others are content to be part of the treatment industry. Greed is what keeps engineers all over the planet looking for ways to create energy more efficiently so we can get more out of what we have. Greed is what keeps people going to work to earn money to buy things that keep other people in their jobs.
Or is there some other reason all of these things happen that I'm overlooking?
Many credit card companies print the terms of the credit card agreement in faint gray ink on the back of credit card statements. This is a legal way of cheating their customers. The harder it is to read the agreement, the fewer customers will know their rights under the agreement, and the fewer disputes will be resolved in favor of customers. This improves the profitability of the credit card company.
A libertarian would salute the clever young person who came up with the gray ink idea and recommend a promotion. It the government passed a law mandating that credit card agreements must be legibly printed and clearly stated, libertarians would howl with protest against the "mailed fist" of the state crushing the innovative spirit of an entrepreneurial company.
Or is there some other reason all of these things happen that I'm overlooking?
Yes, there is.
1. The desire for the respect and esteem of our fellow citizens.
2. The intrinsic satisfaction of doing something worthwhile that you are good at.
3. The wish to protect others who cannot protect themselves.
I know that these concepts are foreign to you, but they enter into the motivations of large numbers of people all over the world.
Greed is the irrational and destructive seeking of personal gain beyond any practical necessity. It has been recognized as a sin and a vice for many millenia. In modern America, in certain circles, it is considered praiseworthy.
@HH
You didn't answer the question so I'll answer it for you.
In point of fact, over 90% of the Amazon rain forest has never been explored by man - at all. So there's no way it could be subject to "deforestation" no matter what someone in Brazil says.
So how big is it anyway?
The Amazon rain forest is over seven MILLION square kilometers in size - That's 1.7 BILLION acres and only 2 million square kilometers smaller than the ENTIRE United States.
@HH
It is my responsibility to read and understand a contract before I sign it. If I can't do either, I don't sign it.
That's why I scraped together the hundred dollars I needed to have my own lawyer at my first house closing.
As for your reasons for working?
I don't care.
I work for money, plain and simple. I love what I do, but I don't do it for free and I don't do it so I feel better about myself or others. When I do a job for someone, I do it for a specific amount of money.
They receive my expertise and performance, and I receive cash to buy groceries and the GI Joe with the Kung-Fu grip.
Buying the food and toy guarantees someone else has a job and can provide for themselves and their family - That's how much I care about them and how I protect them. I give them my money for their work. This is called "free exchange".
To paraphrase someone who was far more intelligent that either of us - If you take away money, all that's left is the point of a gun.
Personally, I'd rather work for money.
You do whatever floats your boat...
That's called "Freedom" - You should read up on it.
>>
I work for money, plain and simple. I love what I do, but I don't do it for free and I don't do it so I feel better about myself or others. When I do a job for someone, I do it for a specific amount of money.
Do you wash the dishes at home for money? How about driving the children to school? Do you do that for money too? Do priests work for money? Do soldiers work for money? Do artists work for money?
Would you kill someone for money if you knew you would not be caught?
Doing "whatever floats your boat" is not called freedom; it is barbarism.
>>
Deforestation is the conversion of forested areas to non-forested areas. The main sources of deforestation in the Amazon are human settlement and development of the land.[22] Prior to the early 1960s, access to the forest's interior was highly restricted, and the forest remained basically intact.[23] Farms established during the 1960s was based on crop cultivation and the slash and burn method. However, the colonists were unable to manage their fields and the crops due to the loss of soil fertility and weed invasion.[24] The soils in the Amazon are productive for just a short period of time, so farmers are constantly moving to new areas and clearing more and more land.[24] These farming practices led to deforestation and caused extensive environmental damage.[25]
Between 1991 and 2000, the total area of forest lost in the Amazon rose from 415,000 to 587,000 km², with most of the lost forest becoming pasture for cattle.[26] 70% of formerly forested land in the Amazon, and 91% of land deforested since 1970, is used for livestock pasture.[27][28] In addition, Brazil is currently the second-largest global producer of soybeans after the United States. The needs of soy farmers have been used to validate many of the controversial transportation projects that are currently developing in the Amazon. The first two highways successfully opened up the rain forest and led to increased settlement and deforestation. The mean annual deforestation rate from 2000 to 2005 (22,392 km² per year) was 18% higher than in the previous five years (19,018 km² per year).[29] At the current rate, in two decades the Amazon Rainforest will be reduced by 40%.[30]
http://en.wikipedia.org/wiki/Amazon_rain_forest#Deforestation
McArdle's is an absolutely brilliant essay, original, and much needed.
(I wish more of the comments were up to McArdle's high standards... oh well...)
mac mccarthy
in complex systems, there can be no such thing as an individual villain.
the Nazi administration/bureaucracy was also a very complex system -
for example people reported to different bosses for different parts of their jobs
by your definition there could therefore have been no individual villains
but as I have earned my living as a bureaucrat (paralegal) in big corporations I claim that at whatever level you get caught up in a complex system and decide you do not have to look too closely you have to take your share of the guilt if things go wrong and you happen to be a mentally fit adult
I think the issue is the historical struggle between those who are willing to do anything to make a buck and those who are trying to protect the public from being fleeced. So the system gets out of balance in one direction and the pendulum swings the other way. In this case deregulation was in the accendency, so we had a housing bubble. This was not because in essence the regulators failed, but that the attempts to get around the regulations suceeded and there was little effort to control the situation. Thus mortgage securities where created with triple A ratings, which should really have had B or lower ratings, due to liquid credit markets, extremely low interest rates, and the lure of profit. Now if all of that excess profit were heavily taxed...
I think the issue is the historical struggle between those who are willing to do anything to make a buck and those who are trying to protect the public from being fleeced.
Exactly right. Guess where Ms. McArdle's sympathies lie.
Smith never, in his wildest imagination, could conceive of capitalism destroying the ecological balance of the Earth, but that is where crude adherence to his principles has brought us.
No it didn't. Look at the environmental damage caused in the communist countries. One can't accuse communists of adhering, crudely or otherwise, to Adam Smith's principles.
It is the accumulated "externalities" of organized selfishness that are biting back.
Luckily Adam Smith tells us how to use organised selfishness to deal with the externalilities, by the use and development of property rights.
Also, there are worse things in the world than selfishness. The history of attempts to build society on motives other than selfishness is extremely scary. The desire to help the rest of humanity has lead to mass murder, numerous times throughout history, from religious wars to the Great Terror of the French Revolution, to Communism in Cambodia. People who are deeply concerned for your well-being are not necessarily people you want to be around.
The mining company makes its profits, goes bankrupt, and leaves a toxic desert behind. The Wall Street trader packages his toxic securities, earns his fortune, and retires, leaving millions of retirees impoverished.
I'm not sure why the mining company is going bankrupt if it is making profits. If you are talking about a process by which it deliberately declares bankruptcy, the owner of the land has the incentive to require a bond before permitting their land to be mined.
Our modern wealth has created retirees, it used to be that you worked until your health ran out and then you were supported by your relatives until you died or you went to the workhouse. Whoever brought the Wall Street traders' securities has the incentive to avoid buying such securities in the future - a lot of Wall Street traders and other financial types are losing money at the moment.
The Devil takes the hindmost, until the hindmost organize and go after the servants of the Devil.
And yet life expectancies keep rising, and in the long-term GDP grows. Nor does the experience with socialist revolutions indicate any advantages to poor people from attacking capitalism.
May I suggest studying some history before engaging in any more political theorising? I note you haven't even tried to defend your earlier claim that in the past people refrained from showing off their wealth.
@HH
If you can't tell the difference between performing labor for someone else and doing the dishes at home or taking the kids to school, perhaps you should attend a remedial reading and comprehension class. A class in logic probably wouldn't hurt either.
When I do the dishes or cut the grass or clean the house or taxi my kids around I do it because I want to and because it pleases me to do so.
When I perform a service for someone else - I do it because it benefits my family by giving me money. It puts food on our table, clothes on our back, and gives us a roof over our head.
Those things all have one thing in common:
They cost money.
How do you propose I get food, clothing, and a put a roof over our head without money?
Or is it the cost of the food and clothing and the size of the house that bothers you?
HH, you seem to be confusing the fact that people like to eat with "capitalism". Amazon rainforest destruction is not being done because rapacious agribusiness controls the (decidedly left wing) government; it's being done because Brazil has a large number of poor people who want the land.
This article seems to suggest that there are two equal and opposite sides in the debate: People for zero regulation and total market forces, and people for zero market forces and total regulation.
This is nonsense. Non-libertarians are not all communists who wish to replace the market with a non-market. They want to let it do its job and regulate it where it is prone to behave irrationally.
Do regulators behave irrationally? Absolutely. But there's no hope for a rational solution if everyone who might make decisions is irrational, so there's no point in trying to plan for it. All we can do is hope that the market will be rational when the regulators are not, and that the regulators will be rational when the market is not, and set up a framework that will allow us to rely on whichever one is more rational in a given situation.
The current credit crisis isn't all that arcane. The details are, certainly, but essentially what went wrong was quite simple and obviously likely to go wrong. People were taking increasingly irrational risks not because they were foolish, but because they were able to pass the risk off to other investors (who, perhaps, were.)
@HH
Forty percent? Really?
Taking the numbers from your Wikipedia reference - as of the year 2000, there were roughly 600,000 square kilometers "deforested".
From 2000 to 2005 the rate of "deforestation" was 23,000 square kilometers per year.
Assuming that rate remained constant through this year, then total would be:
600,000 + 184,000 = 784,000 square kilometers in 2008.
Twenty years from now, given the rate they quote from 2000 to 2005, the total amount "deforested" would be:
784,000 + (23,000 x 20) = 1,244,000 square kilometers
40% of 7 million square kilometers = 2,800,000 square kilometers
2,800,000 - 1,244,000 = 1,556,000
So the person writing that article fudged the final number by more than twice the actual amount.
Are you sure you want to go with that as your supporting evidence?
As a strongly free market, progressive, libertarian entrepreneur with bleeding heart liberal sentiments, I broadly agree with the premise of the article- but can we then state that these opposing choices- regulation vs. market freedom- each have costs and are never perfect solutions? There is a fundamental tension between providing enough regulation to give stability to the system, and laying on so much that incentives- positive and negative- are dampened. Politics is the process whereby we arrive at compromises that are fair, that (hopefully) do the most good for the least harm and do not unduly benefit one group over another. Unfortunately, our political rhetoric has been lost on a path of seeking ideological purity and promising perfect solutions, when what we need is dealmaking and compromise.
The attempt to fasten blame on the CRA is ideologically driven and does not hold up to scrutiny. The CRA is not "at the root" of the problem. In fact, if CRA regulations and standards had applied to non-bank mortgage lenders we would probably not be in this fix. See the study by Traiger and Hinckley:
http://www.traigerlaw.com/publications/traiger_hinckley_llp_cra_foreclosure_study_1-7-08.pdf
"The Community Reinvestment Act: A Welcome Anomaly in the Foreclosure Crisis- Indications that the CRA Deterred Irresponsible Lending in the 15 Most Populous U.S. Metropolitan Areas"
The Community Reinvestment Act was passed in 1977 to eradicate gross discrimination in lending. It required banks and savings and loan institutions to seek qualified borrowers and make loans in the areas from which they took deposits. It was intended to eliminate "redlining" of (mostly minority) neighborhoods. It covered communities, and did not dictate lending to unqualified individuals. While some documentation requirements were softened in the 1990's (14 years ago!), these loans are NOT the ones that caused this crisis. In fact CRA regulated institutions made fewer sub-prime loans, charged lower interest rates, and were half as likely to resell the loans to third parties.
Federal bank regulators were raising red flags about bad subprime lending before 2000, and warned that such loans were not acceptable in banks they regulated. http://www.fdic.gov/news/news/financial/1999/FIL9920a.html
But most of the sub-prime loans that are the subject of this crisis were made by non-bank mortgage companies, which are not covered by CRA regulations. They (Countrywide, New Century, etc.) were the prime instigators of the "liar loans", "exploding ARM's", and other predatory lending practices.
Banks got further into these types of loans only as CRA enforcement was lessened in 2001 and again in 2005. ref. Testimony of Ellen Seidman, Director, Financial Services and Education Project
Before the House Committee on Financial Services, February 13, 2008 It wasn’t until July of this year that the Fed cracked down on "unfair, abusive or deceptive home mortgage lending practices”- a power it has had since 1994.
There is plenty of blame to go around. Untempered greed- and the belief that lenders and securities traders could pocket profits and pass on risk to others- is at the absolute top of my list. The Bush Administration and Congress being asleep at the helm while the crisis built over the last 8 years is up there as well. But the CRA is a factor only in that it's standards were not enforced by an administration to whom regulation was ideologically unacceptable and to be subverted. Unless, of course, the regulations promoted the interests of politically well connected large companies.
RE: Libertarianism is dead
While one appreciates Ms. McArdle's interest in publicizing Libertarianism, it's difficult not to wonder if she is one of the many posing as Libertarians to discredit the approach or give the appearance that there are extreme conservative or leftist varieties. Libertarian groups are in every country, and quite alive.
The major structural causes of the current problems are simple: a continuing war that Libertarians oppose as they oppose all war and that is sucking wealth from the economy, and the buying spree by e.g. local government entities to increase their budgets that is only now coming out as they panic sell their properties. This has been exacerbated by criminal acts by certain brokers and financiers, true, but the solution is not 'regulation' but prosecution, and the transparency that coerced regulation invariably prevents.
It is true most societies have had a coercive (i.e. socielly criminal) base. Libertarians seek to correct that, beginning by asking people to commit to non-coercive solutions as the defining start of being a Libertarian. Has Ms. McArdle made that committment? 400,000 people have.
R.Swanson, Chair, Advisory Board
Libertarian International Organization
M. Gilson
Charter co-founder, former member Executive Commitee
Libertarian Party, USA
HH, you seem to be confusing the fact that people like to eat with "capitalism". Amazon rainforest destruction is not being done because rapacious agribusiness controls the (decidedly left wing) government; it's being done because Brazil has a large number of poor people who want the land.
If you had given the least study to this issue, you would realize that the large-scale clearing of rain forest land requires considerable capital investment. It is not just desperately poor subsistence farmers who are clearing the rain forest; it is ranchers and agribusiness, with government incentives. Small farmers account for only 30% of deforestation.
Your reputation for sloppiness remains unimpaired.
May I suggest studying some history before engaging in any more political theorising? I note you haven't even tried to defend your earlier claim that in the past people refrained from showing off their wealth.
And may I suggest that the alternatives to slash and burn Capitalism are not limited to totalitarian Marxism. You pretend that nothing better can be invented, yet Capitalism itself is an invention that is showing itself badly in need of repair. History did not end with Adam Smith (or Francis Fukuyama).
I did not say that people refrained from showing off their wealth. I said that people were ashamed to publicly praise greed. It took the era of Ivan Boesky to degrade us to that degree.
Greed is not normal acquisitiveness; it is an insatiable lusting after wealth that crushes everything before it. A society that praises greed is a society headed for destruction.