Denialism

[Updated] Free Markets and the Credit Crisis Freefall

—

by

Chris
in

[Update: The WSJ reports that you’re now bailing out AIG.]

For years working in Washington, I listened to libertarian tripe about how privacy law would prevent free markets from operating, and how banks should be able to freely trade personal information to assign risk and create new credit products. The “Miracle of Instant Credit” was invoked as a positive force that would allow banks to move smartly into the subprime market and make more Americans homeowners. They won that battle with the 2003 passage of the Fair and Accurate Credit Transaction Act, which largely superseded state law attempts to rein in the trade of personal information in the financial context. Prior to this, banks also lobbied to remove barriers in place (but weakened) since the 1930s that limited joint ownership of banks, brokerage houses, and insurance companies. Allowing these mergers caused banks to become behemoths that could not be beaten because of their political power.

Frustration with the ideology of the free market radicals, and their blind faith in the market solving problems (if it didn’t solve a problem, the market wasn’t free enough, or the problem wasn’t actually a problem) motivated me to write the Denialist Deck of Cards. These same guys totally missed the housing blowup, or somehow thought they could manage the risk of it. Do you remember the news articles written about mortgages granted to people who didn’t even need to prove their income? Or the huge housing projects being built farther and farther into nowhere?

Well, it’s all coming down on us now. It’s not just the subprime area where the miracle of instant credit fueled the crisis. Prime mortgages, auto loans, and soon, credit card debt will all be in trouble. Meanwhile, the bankers made tons of money and many were just in denial about the crisis. As Credit Slips points out, Lehman Brothers paid out $5.7 BILLION in bonuses in December 2007, overall, compensation was up 9.5% for the year!

I’m happy that the feds taxpayers didn’t bail out Lehman. But other firms are going to fail, and you’re going to be left holding the bag for their denialism and their banal greed. Ultimately, the bailouts may be a good economic decision. But a few years from now when things have changed, let us remember how these people totally abandoned the rhetoric of personal responsibility, free markets, etc, when it was their interests on the line.

Comments

  1. Anonymous

    The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home. (Government responsibility failed)

    Freddie Mac’s mission is to provide liquidity, stability and affordability to the housing market. Congress defined this mission in Freddie Mac’s 1970 charter, which lays the foundation of our business and the ideals that power our goals. (Government responsibility failed)

    Reply
  2. Hank Roberts

    I remember being taught the “social contract” in grade school in the 1950s — that our parents who’d survived serving as soldiers in W.W. II and worked hard before and afterward to make and build the country had made their contribution, and those who collected the profits had contracted to use them well to maintain the country and those who built it.

    This sounded fishy even to a third grader.

    I’ve cited this various places around the web since I first stumbled on it, back when it was available in full text.
    Now it’s paywalled. The documents they relied on to work out what the ‘New Deal’ securities laws really intended are mostly still in storage boxes in the national libraries. Look for them, the article, and citing articles to follow this if you’re curious.

    http://www.ingentaconnect.com/content/ap/pa/2001/00000012/00000004/art00432

    Securities legislation and the accounting profession in the 1930s: The rhetoric and reality of the American Dream

    Authors: Merino B.D.; Mayper A.G.

    Source: Critical Perspectives on Accounting, Volume 12, Number 4, August 2001 , pp. 501-526(26)

    “… regulation should be viewed as symbolic (i.e. not expected to result in significant changes in distribution of economic resources), a means of restoring investor confidence and preserving the status quo. … symbolic legislation might be sufficient to restore investor confidence…. We posit that securities legislation can best be understood as an effort to reestablish the viability of what has been labeled the “American dream”…. passage of the securities legislation must be examined as a response to a moral crisis of capitalism, generated by the “immoral behavior” of the capitalist elite…. the first priority of any regulation had to be to establish the moral legitimacy of capitalism by restoring trust in the existing system….”

    They also quote someone, in the part of the document now paywalled, saying something like “you can’t swindle someone if he doesn’t trust you” and say that’s why restoring trust was essential to capital formation.

    The American dream, they point out, ended with Jefferson’s notion that one could always head to the frontier and create a living out of the wilderness. They discuss securities legislation as the attempt to replace it with the notion that anyone could make money in the stock market.

    Reply
  3. JD

    Seriously? Do you really think that it is free market that has put us in this mess? It is more about greed and fiscal manipulation. You should let history be your guide. Through government management and social policy the Roosevelt administration was able to stretch an economic downturn that would have lasted 18 months to 10 years. Manipulation of market forces always only prolongs the inevitable. To often people are just misguided by the quick fix that their government can take care of them instead of a sense of personal accountability and responsibility. Unfortunately this spills over in to public policy because politicians on both right and left use this to get elected. Or they set policy based on the deep pockets of their constituents. The truth is that a free market economy works better than everything we have ever seen in human history, but like every good idea or practice you can always be guaranteed that their will be some greedy of stupid people to bring the rest of society down.

    Reply
  4. Dean

    Come on – “Through government management and social policy the Roosevelt administration was able to stretch an economic downturn that would have lasted 18 months to 10 years.” – dragging out the myth/conspiracy theory that government actors willfully prolonged the Great Depression? That has no more credence than the trash spewed by September 11 deniers.

    Reply
  5. Adrienne

    JD wrote:

    The truth is that a free market economy works better than everything we have ever seen in human history…

    As evidenced by…..?

    Reply
  6. LanceR

    There is no such thing as a “free” market. If the government (which is *us*) does not regulate proper behavior, market forces tend to aggregate into monopolies. Government regulation is what failed in the current crisis. Regulations were lessened, or not enforced, allowing banks and mortgage companies to become overextended.

    Left to themselves, markets become uneven and overbalanced. A *competent* economist knows this. Unfortunately, the government over the last 30 years has been advised by Milton Friedman-esque economists, who engage in the sort of denialist behavior shown in the Denialist’s Deck. This is the failure of conservative economics we are unfortunate enough to witness.

    Reply
  7. Moopheus

    Have people ever created a system to do anything (at least in politics and economics) that actually works anything like the way it was supposed to, and does not on occasion crash and burn? Sure, the True Believers will tell you over and over again that their way really, really

    Reply
  8. Chuck

    “If the government (which is *us*) does not regulate proper behavior, market forces tend to aggregate into monopolies. Government regulation is what failed in the current crisis.”

    Then *we* failed, regardless of political leanings.

    Reply
  9. moopheus

    Have people ever created a system to do anything (at least in politics and economics) that actually works anything like the way it was supposed to, and does not on occasion crash and burn? Sure, the True Believers will tell you over and over again that their way really, really works if you’d just give it a chance to work the Right Way. The Right Way, of course, is dependent on ignoring the fact that the people involved are stupid, greedy, short-sighted, corrupt, and stupid. And easily distracted by shiny objects. Free market, or not, it doesn’t matter, failure is definitely always an option.

    (sorry about the bad code)

    Reply
  10. LanceR

    Then *we* failed, regardless of political leanings.

    Precisely. We failed to do due diligence on the people we were electing. We failed to follow the news and ask the obvious questions. We failed to stand up and say “I’m mad as hell, and I’m not going to take this anymore!” We failed to demand that our elected *representatives* represent us. We do not elect “leaders”, we elect representatives.

    Regardless of political/social/religious standing, we *all* failed. Now it is time to learn from our mistakes.

    What do we do now? (I have a little list…)

    Reply
  11. D. C. Sessions

    Let me propose to you that the underlying forces that are driving the United States into a lower economic stratum are independent of who’s driving the bus. In the meantime, with major shifts going on there will be turbulence and, as with any up/down cycle, there will be those in a position to cash in whenever the cycle is “up” with little objection since others are getting theirs too — so who minds if the gang at Lehman skims a few percent off for their good management [1]?

    As long as there’s a ratchet system in place (bonuses when the market is up, someone else pays when the market is down) this kind of thing is inevitable.

    Meanwhile, there has been a flood of money entering the financial sector as foreign banks have been buying up US paper to finance the trade deficits, budget deficits, and generally credit-happiness of the United States. Skim a little here, skim a little there — plenty to go around.

    Up until the collapse of the US dollar got through to the banks’ management and convinced them that this was just not a Real Bright Move. At which point the flood of money coming in went away, nothing to skim, too bad so sad.

    Now, I’m not going to defend the ones doing the skimming but they were doing the classic drug-dealer act of providing for the desires of their clientele, never mind whether it’s good for those clients or not. The reason you’re not going to hear any serious discussion of the root causes of the current collapse is that politicians don’t get elected by blaming the electorate for the problem.

    [1] Yeah, I know — in a bubble a flatworm can make millions as a “manager.”

    Reply
  12. Colugo

    Is the current financial crisis really all the fault of libertarians and conservatives?

    Lindsay Renick Mayer, OpenSecrets.org, 9/12/08:
    http://www.opensecrets.org/news/2008/09/brothers-grim-is-lehman-next.html

    “Since 1989, Lehman Brothers’s employees and political action committee have given $9.2 million to federal candidates, parties and political action committees, with 54 percent of that going to Democrats. In the current Congress, 271 lawmakers have collected nearly $3 million since 1989, with 72 percent going to Democrats. Democratic presidential candidates and senators Hillary Clinton and Barack Obama top the list of all-time recipients for the company, collecting $410,000 and $395,600 respectively. Sen. Charles Schumer, D-N.Y., a member of both the Senate Banking, Housing and Urban Affairs Committee and the Senate Finance Committee, hauled in $181,450, while Sen. Chris Dodd, chair of the Senate banking committee, has collected $165,800. The top recipient of PAC money from Lehman Brothers has been Rep. Mike Castle (R-Del.), a member of the House Financial Services Committee, which has jurisdiction over banking and the securities industry. Castle has collected $38,500 from Lehman’s PAC since 1993.

    This election cycle, Lehman employees have given about $1.3 million to presidential candidates. Only fellow financial giants Goldman Sachs, Citigroup and Morgan Stanley have given more to the presidential hopefuls this election cycle. Lehman employees have made their firm one of the top contributors to both Obama ($370,500) and John McCain ($117,500) this election cycle. The company is also on track to spend more than $800,000 on federal lobbying this year.”

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

    “Franklin Delano Raines … is the former chairman and chief executive officer of Fannie Mae who served as White House budget director under President Bill Clinton. …

    He served in the Carter Administration as associate director for economics and government in the Office of Management and Budget and assistant director of the White House Domestic Policy Staff from 1977 to 1979. …. In 1991 he became Fannie’s Mae’s Vice Chairman, a post he left in 1996 in order to join the Clinton Administration as the Director of the U.S. Office of Management and Budget, where he served until 1998….

    On December 21, 2004 Raines accepted what he called “early retirement” from his position as CEO while U.S. Securities and Exchange Commission investigators continued to investigate alleged accounting irregularities. He is accused by The Office of Federal Housing Enterprise Oversight (OFHEO), the regulating body of Fannie Mae, of abetting widespread accounting errors, which included the shifting of losses so senior executives, such as himself, could earn large bonuses.”

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

    “[Jamie] Gorelick joined the Washington, D.C. law firm Miller, Cassidy, Larroca and Lewin in 1975 and worked for them as a litigator until 1993, except for 1979 to 1980 when she was an assistant to the U.S. Secretary of Energy. [note: Carter admin] Gorelick was president of the District of Columbia Bar from 1992 to 1993.

    Under the Clinton administration, Gorelick served as general counsel of the Department of Defense from 1993 to 1994, when she was appointed Deputy Attorney General of the United States, the No. 2 position in the Department of Justice. Gorelick served as Vice Chairman of the Federal National Mortgage Association from 1997 to 2003. …

    Even though she had no previous training nor experience in finance, Gorelick was appointed Vice Chairman of FNMA from 1997 to 2003. She served alongside former Clinton Administration official Franklin Raines, and earned over 26 million during her six years there. During that period, FNMA developed a $10 billion accounting scandal. One example of falsified financial transactions that helped the company meet earnings targets for 1998, a “manipulation” that triggered multimillion-dollar bonuses for top executives. Gorelick received $779,625.”

    Reply
  13. mayhempix

    Free market radicalism is just another form of ideological fundamentalism, only the god is money and the scriptures are our personal information. The idea that there should be no rules and regulations to level the playing the field and protect unwilling participants in a world wide gambling game is insane. At least when someone loses big at the casino, they can’t use our money to cover the loss.

    Currently socialisim in the US is reserved for the rich who gamble and lose big in the markets and the residents of Alaska who receive, by far, the highest per capita federal funds in pork and subsidies, plus a yearly payback on oil. It is not Alaskan oil, it is US oil. In essence we are paying for oil kickbacks to Alaskans with federal tax dollars. It’s time to reverse the tables and payback the vast majority of us who have footed the bill for them for decades. Single payer health care and guaranteed college educations anyone?

    Anyone who believes that the McCain-Palin ticket is really going to change the way it is done are big time denialists.

    Here is my analysis of the speeches given by McCain and Obama this morning on the market failures:

    McCain:

    2 + 2 = 5
    My friends, I will never lie to you.

    Obama:

    2 + 2 = the square root of 16
    To the people of America I say that the answers are never simple and I will make sure you understand that because I respect you and this great nation.

    Reply
  14. mayhempix

    “The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home. (Government responsibility failed)

    Freddie Mac’s mission is to provide liquidity, stability and affordability to the housing market. Congress defined this mission in Freddie Mac’s 1970 charter, which lays the foundation of our business and the ideals that power our goals. (Government responsibility failed)”
    Posted by: Anonymous | September 16, 2008 1:55 PM

    Fannie and Freddie worked great until they were partially privatized and it became about stock profits, CEO salaries and parachutes, and the bundling and selling of the loans as investments for quick immediate profits. The government was much more conservative about giving loans to qualified buyers. It was privatized greed that crashed the companies.

    Reply
  15. Igor

    Ditto, mayhem. I notice that some people either don’t know that Freddie Mac was charted by U.S. government or conveniently omit the fact that it was subsequently privatized.

    Reply
  16. mayhempix

    Posted by: Colugo | September 16, 2008 5:46 PM

    Sorry Colugo, but even if the Dems, as you so badly want to believe, are responsible for opening the floodgates, after Reagan who started the deregulation ball rolling, the Reps controlled Congress during the majority of the Clinton years and had almost eight Bush years to change the policy… and they didn’t.

    The Dems have always believed in a liberal economy which is defined as regulated capitalism with social responsibility to infrastructure, education, etc. The Reps think all government programs and regulation is bad, except when government and military contracts benefit their wallets directly.

    Reply
  17. Chris H.

    I don’t think this is a dem/rep issue. In fact, some of the most vigorous advocacy of the miracle of instant credit idea came from middle of the road republicans and moderate dem think tanks (like Brookings). The point is that both parties bought into this idea, and no one was willing to apply the brakes when mortgages were being made to people who clearly couldn’t afford them based on the hope that housing values would increase endlessly.

    Reply
  18. mayehempix

    Grammar Police

    Posted by: mayhempix | September 16, 2008 7:01 PM
    The Reps think all government programs and regulation ARE bad…

    Reply
  19. mayhempix

    @ Chris H

    I agree with you. However the talking points and propaganda machine of the right is gearing up to pin it on the Dems to control and derail the real conversation as we approach the election. Colugo’s post and wingnut radio talk shows and blogs are just another sign that no lie, either implied or directly voiced, is going to far in order to win.

    Reply
  20. Colugo

    “based on the hope that housing values would increase endlessly.”

    I’m old enough (and I’m not that old) to have seen several major bubbles. When a bubble is growing there’s talk that we are in a new economic paradigm and that the particular commodity will go up forever. A lot of people are happy except those looking to buy, who complain about speculation making the commodity unaffordable. When the bubble bursts, those who invested want to be bailed out and there are calls to clean up the system. The value of the commodity is suppressed and the larger market is jittery for some time afterward, since people are wary. Until the next bubble.

    Reply
  21. Colugo

    “Colugo’s post and wingnut radio talk shows and blogs are just another sign that no lie, either implied or directly voiced, is going to far in order to win.”

    Point out my “lie,” mayhempix.

    By the way, I am not antiregulation. I am nowhere near an economic libertarian. (Nor do I buy simplistic Republicans-good-Democrats-bad, nor the reverse.) Regulation can affect markets (and bubbles) in interesting ways. Regulation itself is no guarantee against bubbles and economic crises.

    Reply
  22. mayhempix

    Posted by: Colugo | September 16, 2008 7:42 PM
    “When a bubble is growing there’s talk that we are in a new economic paradigm and that the particular commodity will go up forever.”

    It must be a coincidence that the biggest cheerleaders are free market zealots spouting it is proof of the power of deregulation.

    Reply
  23. bwv

    The utter vapidity and partisan histrionics of the original post can be demonstrated by the simple fact that the housing bubble from 2000-2007 was a global phenomena, so unless you want to blame libertarians & republicans for the housing bubbles in Sweden, Spain, Finland, The UK, etc.

    For exampls the Riksbank’s latest report:

    “Swedish house prices have increased by an impressive 130% in real terms over the last 10 years”.

    “Our colleagues David Miles and Vladimir Pillonca estimate that slightly more than 50 percentage points of this increase can be attributed to expectations of further increases in house prices, while only around 30 percentage points can be put down to the reduction in real interest rates.”

    “At the same time, household indebtedness as a proportion of disposable income has reached 140% (see the Riksbank’s latest Financial Stability Report).”

    http://housingfinland.blogspot.com/2008/01/swedish-housing-price-2008-judgment.html

    Reply
  24. mayhempix

    @Colugo

    “Point out my lie…” is the current right wing meme to dismiss implied meaning. Witness the sex education ad to swiftboat Obama. Even though it is “factully correct” what is left out and how it is presented implies a completely false conclusion. And please notice that I wrote “implied or directly voiced…” which you conveniently left out.

    I do agree with the rest of your post about the unforseen effects of some aspects of regulation and am glad to learn you are not a dogmatic libertarian or wingnut. My apologies if I jumped to a overly quick conclusion per your motives. The news shows and blogs are full of decepetive talking points disguised as objective commentary.

    Reply
  25. mayhempix

    @Colugo

    My bad.. you did include “implied” in your comment.

    Reply
  26. Colugo

    “My apologies if I jumped to a overly quick conclusion per your motives.”

    No worries.

    Reply
  27. Colugo

    Interesting.
    http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print

    Stephen Labaton, New York Times, September 11, 2003:

    “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

    Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

    The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

    The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates. …

    The administration’s proposal, which was endorsed in large part today by Fannie Mae and Freddie Mac, would not repeal the significant government subsidies granted to the two companies. And it does not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enables them to issue debt at significantly lower rates than their competitors. Nor would it remove the companies’ exemptions from taxes and antifraud provisions of federal securities laws. …

    The Office of Federal Housing Enterprise Oversight, which is part of the Department of Housing and Urban Development, was created by Congress in 1992 after the bailout of the savings and loan industry and concerns about regulation of Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them as securities or hold them in their own portfolios.

    At the time, the companies and their allies beat back efforts for tougher oversight by the Treasury Department, the Federal Deposit Insurance Corporation or the Federal Reserve. Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. This year, however, the chances of passing legislation to tighten the oversight are better than in the past.

    Reflecting the changing political climate, both Fannie Mae and its leading rivals applauded the administration’s package. The support from Fannie Mae came after a round of discussions between it and the administration and assurances from the Treasury that it would not seek to change the company’s mission.

    After those assurances, Franklin D. Raines, Fannie Mae’s chief executive, endorsed the shift of regulatory oversight to the Treasury Department, as well as other elements of the plan. …

    Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

    ”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

    Representative Melvin L. Watt, Democrat of North Carolina, agreed. ”I don’t see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,” Mr. Watt said.””

    Reply
  28. Oldfart

    @Colugo:

    I love how right wing apologists jump directly from Carter to Clinton as if the Reagon/Bush I years did not exist. And, of course, they end their arguments at Clinton.

    Gorelick and Raines were, of course, abducted by aliens during the Reagon-Bush years.

    Even though she had no previous training nor experience in finance, Gorelick was appointed Vice Chairman of FNMA from 1997 to 2003….

    Was that something of a Palin-type appointment?

    Reply
  29. Der Bruno Stroszek

    the housing bubble from 2000-2007 was a global phenomena, so unless you want to blame libertarians & republicans for the housing bubbles in Sweden, Spain, Finland, The UK, etc.

    This is only absurd if you assume that there are no free-market advocates in other countries. Here in the UK, I can tell you that they do exist, and if anything they’re even more obnoxious than the ones in America.

    Reply
  30. Natalie

    Through government management and social policy the Roosevelt administration was able to stretch an economic downturn that would have lasted 18 months to 10 years.

    This is an excellent example of fudging history to prove a bs point. The Great Depression started in the fall of 1929. Herbert Hoover was president until the winter of 1933. The depression had already lasted 3 1/2 years before Roosevelt took office, you moron. So much for a downturn that “would have lasted 18 months.”

    Hoover tried the exact kind of free market bs you presumably support to get us out of the Depression, and it didn’t work. There’s a reason he wasn’t reelected, while Roosevelt was releected 4 times.

    Reply
  31. Natalie

    Gah, the last sentence should say “Roosevelt was elected 4 times”, not releected. He didn’t serve five terms in office (or even 4, since he died early in his 4th).

    Also, for first anonymous, if government responsibility is what brought down Fannie and Freddie, what brought down Indymac, Bear Sterns, Lehman Brothers, and Merril Lynch?

    Reply
  32. Dunc

    Do you really think that it is free market that has put us in this mess? It is more about greed and fiscal manipulation.

    In what sense are “greed and fiscal manipulation” separate from the “free market”? The “free market” runs on greed, and fiscal manipulation is the means to satisfy it. They are inseparable.

    Reply
  33. Anonymous

    Indymac – Chuck Schumer
    Bear Sterns, Lehman Brothers, and Merril Lynch – investments created by Fannie and Freddie

    Reply
  34. LanceR

    Bear Sterns, Lehman Brothers, and Merril Lynch – investments created by Fannie and Freddie

    You’re kidding, right? You’re not really that delusional, right? All three investment companies you named predate Fannie and Freddie by decades. Charles Schumer may have hammered the final nail into Indymac’s coffin, but the company was screwed six ways from Sunday long before he shot his mouth off.

    For pete’s sake, that took me all of thirty seconds with Google. It’s one thing to lie, it’s an entirely worse (read: more idiotic) thing to lie *BADLY*

    Sheesh.

    Reply
  35. Anonymous

    “All three investment companies you named predate Fannie and Freddie by decades.”

    But all of their investments didn’t happen decades ago.

    Your lies are also *BADLY* written.

    Reply
  36. LanceR

    True, the investment mix did change recently. Why was that allowed to happen? Simply put, the laws regulating credit were relaxed to allow “the market” to be “free”. This “free” market has failed.

    Any questions so far? Regulations relaxed, speculation rises, bubble bursts, Ma and Pa Kettle take it in the shorts.

    The original statement was that government was responsible for the failure of Freddie and Fannie. The response was, if the “gubmint” caused those failures, what took out the *completely private* corporations such as Bear Stearns and IndyMac. Your (abbreviated) response was that investments “created by Fannie and Freddie” caused those failures. The mortgages “bundles” that precipitated the current problem were *not* created by FHLMC or FNMA. They did, it is true, deal in “secondary mortgages”, but the current problem is because of the junk bonds OTHER companies put into the market.

    Also, Fannie and Freddie are *PRIVATELY OWNED*. (until just recently)

    The current crisis is due entirely to laissez-faire economic policies, the failure of “conservative” politicians to enforce regulations, and deregulation.

    Seriously. Do some research before you post on any blog, especially in the ScienceBlogs domain. People here *do* tend to know what they are talking about.

    Reply
  37. Anonymous

    How is it better for Ma and Pa if the gubmint takes over major institutions in the housing and insurance industries when they can’t even balance their own budget?

    Reply
  38. Natalie

    Your (abbreviated) response was that investments “created by Fannie and Freddie” caused those failures. The mortgages “bundles” that precipitated the current problem were *not* created by FHLMC or FNMA.

    And even if those investments were created by Fannie & Freddie, no one forced all those private companies to make the bad investments. They made that decision all on their own.

    Reply
  39. Blake Stacey

    Also, Fannie and Freddie are *PRIVATELY OWNED*. (until just recently)

    My new hypothesis is that libertarianism is just a conspiracy to further the nationalization of all major economic institutions.

    Reply
  40. LanceR

    How is it better for Ma and Pa if the gubmint takes over major institutions in the housing and insurance industries when they can’t even balance their own budget?

    Actually, whoever you may be, government takeovers are generally a Very Bad Thing(tm). What would work better is what we *used* to have, from the 30s until the 80s: strict regulation forcing companies to follow the rules. There is a knee-jerk reaction from conservative and libertarian types that all regulation is bad. Too little regulation is as bad as too much regulation. There needs to be a happy balance found that allows businesses to get along, while protecting society from the excesses of necessarily amoral corporations.

    @Blake: Interesting. Paranoid and scary, but interesting! <grin>

    Reply
  41. Paul Murray

    “If the government (which is *us*) does not regulate proper behavior, market forces tend to aggregate into monopolies.”

    This is actually very simple to model – N persons, each start with M dollars, and they trade at random with one another, each trade a random number being up to the amount of money they have/2 (rounded up). After not too long, one person will wind up with all the cash.

    You can keep the game going longer – indefinitely – with a wealth tax.

    Reply
  42. Simon Farnsworth

    The usual free market rhetoric misses the big elephant in the room. The free market is only shown to work under certain assumptions:

    1) All participants have equal knowledge – the market breaks down if there’s an asymmetry, as I can use the knowledge I’m hiding from you to make better deals. Note that this applies both ways; for example, you shouldn’t be able to hide knowledge about your circumstances from a potential lender, but they shouldn’t be able to hide knowledge from you (e.g. their realistic models of future house prices).
    2) Individual participants must be able to walk away from deals. If there’s a reason why you must deal with someone, (e.g. monopoly supplier), the model breaks down.
    3) Finally, individual participants must suffer for bad decisions, relative to how bad the decision was. If I can escape penalty for my bad decisions (e.g. via government bailout), the model breaks down.

    Most of the things “free market” and deregulation” people call for are reduction in regulation – to get a true free market, you need quite a lot of carefully targeted regulation.

    To start with, you need regulation that prevents monopolies, or at a minimum regulates them to the point where they’re not impacting on the market. This is hard to get right – think about how you’d regulate last-mile Internet connectivity, for example.

    Second, you need to penalise participants who abuse asymmetric knowledge – you can never prevent it from existing, but you need people to be scared of misusing it.

    Third, and hardest, you need ways to ensure that you never save participants from their mistakes. If a company gets “too big to let collapse”, you’re in trouble.

    I don’t claim to have answers here; but it’s worth bearing in mind that economics is all about finding a way to distribute scarce goods. It’s up to us to decide what economic model works best for us, be it unregulated markets, communism, feudalism, free markets or whatever. And also, we need to remember when thinking about this that economics deals in scarcity – if something is not scarce, economic models break down.

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  43. Natalie

    Third, and hardest, you need ways to ensure that you never save participants from their mistakes. If a company gets “too big to let collapse”, you’re in trouble.

    Which is where our current problem lies, I think. It’s all well and good for me to say, “let Bear Sterns/AIG/ whoever’s next solve their own damn problems”, except that the lack of regulation has made their problems my problems (and all the rest of us). If we had followed Simon’s first two points, we could follow the third. But in the current economy, I think we’re stuck holding the bag either way.

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  44. Francois

    @JD:
    “Through government management and social policy the Roosevelt administration was able to stretch an economic downturn that would have lasted 18 months to 10 years.”

    HA HA HA HA HA HA!!
    ROFLMAO!!

    The source of this canard is the ineffable lying shill Amity Schlaes, whose book on FDR is the US Neocon equivalent of the Soviet revisionists who would like the Russians to believe that Stalin’s era was the best thing ever to happen to them.

    No serious econ historian take your assertion as true, and for very good reasons.

    Another mega-imbecile (Jerry Bowser) has been trumpeting for at least a year now, that the main reason for the subprime crisis is the Community Reinvestment Act of…1977!!

    Only in the USA do we have a well-financed, systematic effort to distort and revise financial history in real time.

    No wonder it is the cradle of the Denialism blog too.

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  45. MikeL

    Wow, the ignorance about free market economics here is astounding. We are indeed in deep trouble.

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  46. minimalist

    Oh, okay. Thanks for sharing your wisdom, Drive-By McGee.

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  47. Troy

    I’ll spell it out for you minimalist. You all believe regulators are disinterested consumer advocates out to protect the people, while the people themselves are selfish and greedy. Why would the regulators not be selfish and greedy as well? Arthur Silber wrote a good summation of the liberal thought process on this idea a few years back: “Almost everyone now accepts the notion that government should control business, since almost everyone seems to believe that people are basically rotten and will lie, exploit and manipulate others if given half a chance. The idea of a man or woman in business who thinks that honesty and integrity might be a means to success now seems to be utterly foreign to our way of thinking. Therefore, government — which people conveniently forget is run by other people, but people who somehow are far more perfect than the rest of us will ever be and not subject to the foibles which plague all non-governmental humans — must regulate business for ‘the public good.’”
    http://powerofnarrative.blogspot.com/2005/06/waiting-game.html

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  48. minimalist

    You all believe regulators are disinterested consumer advocates out to protect the people, while the people themselves are selfish and greedy.

    You’re not talking free market economics now, you’re just putting words in our mouths.

    Let me spell something out for you, Mento the Magnificent Mind-Reader: I — and I guaran-fucking-tee you that pretty much everyone else here feels the same way — do not believe that government is “perfect”.

    What it is, is answerable to us and our interests in the form of elections and lobbying. We get to vote the bums in, and vote the bums out if we don’t like ’em; not so much for the CEOs of big corporations. What it does, is bring the force of law to represent the interests of people versus companies that feel they only need to satisfy the interests of shareholders. Because if you’re going to argue that unregulated industries aren’t going to cut corners and otherwise do things that aren’t strictly in the interest of the public at large, I’ve got a front page full of updates on poisoned medication and crank cures for you to look at.

    On the other hand, the beauty of our system is that corporations, in the form of lobbying, also have a say in how regulations are shaped, and can influence public opinion through advertising.

    Ultimately, ideally, a balance is struck between excessive regulation and laissez-faire whoops-there’s-poison-in-your-allergy-medication capitalism.

    In other words, it is a system kept in some semblance of balance. Checks and balances, if you will, and everyone’s interests get represented, to some extent.

    Of course it’s not perfect; of course it rarely achieves the ideal. Nobody here will pretend that it does. Regulators can go too far, or be asleep at the wheel — a friend in the know has told me that Sen. Chris Dodd has, for years, been pushing against GSE reform, helping lead to the Fannie Mae/Freddie Mac disaster, and this is attributable to the large wodges of lobbying cash he’d been given by the banking industry. But you know, that should tell you as much about the shortsightedness of the bankers as it does the imperfection of the regulators, and therefore the necessity of some form of regulation.

    Anyway, pretending to know what other people think is a surefire way to be ignored or derided, so consider yourself lucky I’m even giving a serious response to your presumptuous stupidity.

    Meanwhile, I’m still waiting to be schooled on economics. I’m not an economist and don’t pretend to be one, so it should be easy. You couldn’t even manage that.

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  49. Troy

    In what way have any of our elected leaders and unelected regulators actually been held to account? Nearly all officials in our government agree on the current buyouts, if not the tact with which they’re being done. The range of opinion of most people who run for office (that are considered serious anyway) subscribe to the same basic concept of regulatory institutions heavily lobbied by, if not outright controlled by, companies in the respective industries. Basically anytime you want to vote some bum out, you’re left with the only alternatives of voting for someone who, might, be less corrupt or voting for someone corrupt in a field you think of less importance.

    As you mentioned, regulations bring the force of law to bear on companies. So those same companies have to lobby for their interests whether they want to or not. The result is that more often than not (and I’d like to know a counter-example) regulatory bodies are dominated by the very companies which they are supposed to control. That’s what I was getting at, regulations are just a way for corporations to set up monopolies and crush competition through onerous regulation. These regulations, whatever safety or public health benefit they may arguably have, serve the purpose of keeping the large companies in control of the regulatory state as the only players in the market and to keep everyone else out (public health and safety benefits are largely not important as to why the regulations are actually implemented).

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  50. minimalist

    I think that’s kind of a bleak view, and I’d like to know an example before I can give a counter-example.

    I think there’s a very clear difference in the way regulations are enforced through the executive branch. The FDA and EPA are very well-documented examples where, frankly, Clinton enforced the regulations well, and Bush is infamous for replacing regulations with “optional suggestions”, particularly with the EPA. Not to oversimplify, but I think one way the voters can enforce oversight is by simply voting Democratic, and that’s one reason (among many) I’m voting Obama, though I do think McCain would probably at least be marginally better than Bush in that regard.

    As for the financial crisis, it’s early days yet, and as one example Dodd is in fact under investigation by an ethics commission for his cozy relationship with the banks. And he’s not up for re-election and it’s too early to tell anyway, but with his possible role in exacerbating this crisis, he could be made very vulnerable to a grassroots challenge, even in the primary. It’s happened before in CT (see: Joe Lieberman in ’96), and CT is very swingable on economic issues, being made up of blue-collar workers and richie-rich ex-NYC moneybags.

    Ultimately though, in the short run, there may not be much that can be done to “watch the watchmen”, because in all likelihood Congress will need all hands on the Banking and Finance committees and such, in order to to avert the comimg utter collapse of America’s financial system. As in, we may not have seen the end of this, by a long shot. We are talking doo-doo city here.

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