Friday, September 12, 2008

Washington Post on Ideology Meets Reality : Market Intervention Time!

The government now finds itself hip-deep in the direct management of the financial system, rescuing four of the country's biggest financial institutions -- Bear Stearns, Fannie Mae, Freddie Mac and now Lehman Brothers -- from the harsh discipline of markets and the consequences of their own misjudgments. ...
As with the Great Depression, it has taken a full-blown financial crisis to shake the faith that free markets will always deliver better outcomes than politicians and bureaucrats.

12 comments:

Graham said...

When the government is run by people like former FEMA director Michael Brown it isn't a surprise that people would lose faith in government. It also doesn't help that when the head of the CIA who was in charge of the two worst intelligence failures in history is rewarded with a medal of freedom for his incompetence. Finally, the party in power for 90% of the last 30 years has a philosophy that government CAN'T be the solution to the problem because it IS the problem. This philosophy doesn't really make for government of the people for the people. The lovely ladies of MMS in Denver are but the most recent example of poor oversight of government agencies and cozy relationships with those they regulate.

It is time for a government that is run by competent people who understand that they are there to keep the interests of the citizens in mind (and that also means not unnecessarily impeding commerce). I don't see John McCain as being able to do that. He's been in congress 30 years and has gone along with the Bush administration 90% of the time. The free market is as fallible as government policy because in the end, it is run by humans prone to vice and simple mistakes.

Eric said...

WHAT!? You can't possibly believe that these are the results of the free market!

Okay... I just had to delete a whole ranting paragraph to collect my thoughts.... I don't think I can make this short.

You must ask yourself at some point, "What influences or incentives were in place to induce these poor executive decisions?"

Americans' ignorance toward free markets is perpetuated by journalists who don't understand them either... cue cliche: *The blind leading the blind*

Please allow me to point out that you have overlooked a crucial element to these poor executive decisions: government policy.

Market influences are distorted by government involvement. For example, the Fed injects money into the system and it makes borrowing funds cheaper--just like any other commodity. Low interest rates, in turn, induce companies to borrow and expand based on the false presumption that there has been a growth in productivity. Eventually, the individuals that make up "the market" realize that the gain wasn't actually as big as reported, and there is not sufficient growth to support the business expansion. Then comes the economic malaise: foreclosures, business downsizing (job losses), and the plea for government salvation.

Let's say Joe makes an investment in a Roth IRA based on the government policy that he will be able to withdraw the gains tax free at some later date. However, 30 years down the road government says, "Ooops! We don't have enough money to pay our obligations and we need the tax money. So Pay up!" Here Joe rationally acted upon a government policy that negatively affected the government and, ultimately, himself.

Granted, free markets periodically go through corrections; but, please, please discover that the reason the Great Depression was so terrible because of government policies such as the Smoot-Hawley Tariff Act.

Think about this: the executives were RIGHT in their assumptions! The government DID bail them out--so much for market consequences. They're just going to do it again, and again, and again!

To summarize, markets DO go through corrections; but, they wouldn't be nearly as severe or frequent if government did NOT stick its nose where it does NOT belong.

Graham said...

"markets DO go through corrections; but, they wouldn't be nearly as severe or frequent if government did NOT stick its nose where it does NOT belong."

I didn't have time to read the rest of your drivel but I did catch this one statement at the end...
So are you saying that if government didn't stick it's nose where it didn't belong, for example bailing out Bear Stearns, or bailing out Fannie Mae/Freddie Mac then the current downturn would have been less severe?

Did I really understand what you're saying? Because this is completely counter to what everyone else has said. Namely, if the government hadn't jumped in the Bear Stearns fiasco and Freddi/Fannie fiasco would have been much worse. I think you have some explaining to do because your arguments don't really match reality.

Your free markets mantra isn't holding any water in light of current events. In the case of the current financial crisis, I think the free market should be allowed to fail. Unfortunately that would mean a lot of investors, who were not informed properly of actual risk, will be left holding the bag and will therefore be screaming for better regulation in the future. Regulation by the government has benefits. It will adequately ensure that risk of certain financial products is accurately reflected. At least that should be the intent of regulation. When you have CEOs that are basically lying (there is no other word for it) about their risks, then someone needs to step in and make sure that the lying will not continue.

I am waiting to see some of these executives that were lying about their companies' financial health go to jail... but as a realist I am not holding my breath.

Eric said...

Graham, To answer your question: No, you don't understand what I'm saying. Maybe if you took the time to read the rest of my "drivel" you may have understood.

I'm saying regulations cause CEOs and other executives to act on poor information perpetuated by government policy. In this current situation, the bailout does reduce the severity of the crash; HOWEVER, it only delays the inevitable. And in doing so, it will be WORSE later.

What I'm saying, is that without government involvement we WOULDN'T BE in this position in the first place. I think the failures should occur, otherwise they have only learned that the government will bail them out every-single-time.

Maybe you should also stop listening to what "everyone else" is saying. That's probably why you don't understand free markets either. Contrary to what you say, the free market is acting exactly to "theory" right now.

Graham said...

Your solution seems to be less regulation when the root cause of the current financial crisis is lack of regulation. Lack of oversight to make sure that loans were given to people who might actually be able to afford them.

I don't think I really know what your solution would be other than less government involvement if I am reading your drivel correctly. I think you are in the minority on this issue. The problem is that there was inadequate oversight of FNMA and FHLMC.

you say "I'm saying regulations cause CEOs and other executives to act on poor information perpetuated by government policy." It sounds like you're blaming the government for causing the current financial crisis. On what evidence do you make this statement? I think this is pure free market, knee-jerk mantra and not based on any evidence I have seen. The current financial market was bundling high-risk and low-risk loans into products that did not accurately quantify risk levels. And when millions of people started defaulting on their loans, these securities went under. I don't see how government can be blamed for that since that industry was relatively unregulated. You need to do some more connecting of dots before you can bloviate on your free-market, anti-regulation opinions. You don't have me convinced since you just repeat the same thing ... it's government's fault, it's government's fault yada, yada, yada.

Eric said...

Graham,

It is clear to me that your thinking is far too shallow to comprehend exactly what I'm talking about. You keep spouting off the same rhetoric as the talking heads on the television. I know these ideas sound crazy to you, because I used to think exactly the way you do now. "Oh! The big companies are taking advantage of the little guy."

"People respond to incentives not just in markets but in every situation they find themselves in." http://www.econtalk.org/archives/2008/07/munger_on_the_p.html

Regulation shields one party from the full consequences of the poor decisions they make, reduces competition in that specific sector, and raises the price of just about everything for you and me. Think back to the stock market crash of '29. Most of the big players did not believe that the government was going to bail them out--many of them committed suicide rather than be a pariah of the financial community. Now they KNOW that the government is going to rush to their aid; hence, it gives them the incentive to make investments (decisions) they would not have otherwise. And YOU would do no different.

The hundreds of thousands of people who now work for some level of government are doing exactly the same thing. They're relying on a promised government pension and social security when they retire; hence, they do not adequately save and invest in personal accounts. That's NOT the personal responsibility this blog's author is claiming to support. What is more, they're discouraged from doing so because of the tax consequences. The armed forces are no different! The Government has instituted a Thrift Savings Plan (TSP) to make military members more responsible for their own retirement. They're transitioning just like any other business away from the costly tradition of a life-time pension.

Why is it not clear to you that the current regulations have not protected the consumer? Yet, you clamor for more of this same intervention on the behalf of "consumer protection." The truth of the matter is that the big executives have you and everyone else who pleads for more government intervention in their hip pocket. You are part of the problem and you don't even realize it. You and the big executives are on the SAME SIDE, but for opposing reasons. More regulation will only protect their profits: see Freddie Mac/Fannie Mae/Lehman bailout as examples.

But Hey, it's all in the name of equality, right? Legislated equality sucks. Join the military if you want to know what socialism is like--I did. Although that's not why I joined, but that's the experience that I got. In fact, it wouldn't be much of a stretch to say that left-leaning "progressives" don't appreciate diversity since they all want us to "live in tenements, work for the government and take the light rail to work." Liberals have distorted what equality is supposed to mean--not that we are all equal, but that we all have equal opportunities. Government licenses, permits, and other constraints limit opportunities especially for the poor and middle class. You can't even cut someone's hair without a damn license! Tell me how that protects the consumer. Tell me how that GOVERNMENT POLICY is not anti-competitive. And do you know who lobbied for those controls? The owners of barber shops, beauty salons, and cosmetics manufacturers! I'm sure someone who got a bad haircut needed to be protected from going back to the same barber.

I shouldn't have to explain that commerce is based on trust. That's the reason you and everyone else does not bother to read the contractual fine print. That's because it's all printed pollution. We all trust that the other party to a transaction isn't trying to take advantage of us, and we assume that all that printed material protects us, but it clearly does not. Government regulation perpetuates the financial ignorance among the middle class that these head honchos are counting on.

The state of the economy will continue to decline until foreign AND domestic spending is severely curtailed. It does not matter whether the government spends it's stolen money on this pointless War On Terrorism or social equality programs at home. The phony money to fund the fiscal deficit all comes from the same fraudulent place.

Since your impatience seems to lead you straight to the last paragraph, you should take the time to read what a minority of people have to say and think about what you're doing to make the situation worse. Look beyond the current issue and think! Mark my words, this economy WILL collapse at some point in the future; and if you vote for either Obama or McCain, you won't even be permitted to have a firearm to protect yourself.

Graham said...

Eric,

I read your entire post. You sound like a Ron Paul strict libertarian kook. Hard core libertarians seem to have about the same amount of rationality as hard core communists which is to say none. You and communists are the same things but at different ends of the spectrum.

You say the
"It wouldn't be much of a stretch to say that left-leaning "progressives" don't appreciate diversity since they all want us to "live in tenements, work for the government and take the light rail to work."

I would say I am a left-leaning progressive but I don't care where the hell you live. If you want to live in the suburbs and drive an SUV fine, but you should have to pay the full cost of that lifestyle choice. You should be required to pay more for road tax since you will use the roads more. I would like to see the federal government RAISE the gas tax to a point where it could pay actually pay for our roads. A libertarian would say, the government shouldn't be building roads and leave that to the free market. Fine. Do that. I can afford to pay a toll or I would just take the train more often to work. Whatever. Most people who consider themselves libertarians have no idea what that would mean to their lives but like the sound of it. Libertarians are frightful people with even more frightful ideas who should NEVER, NEVER be allowed to have any real power.

You have no facts and you have a doom and gloom outlook with zero solutions. I am done trying to convince you that the answer to every problem is not the free market. You should do a logic exercise and try to eliminate government from everything and see what you would end up with. It would be chaos and anarchy.

By the way, as of the time you wrote your article, THERE WAS NO Lehman bailout. I agree with you... the federal government should not bail out Freddie/Fannie or at least if it does, it should demand total control and prosecute the CEOS of those companies who were lying to their investors. The solution may not be more legislation but starting by enforcing the laws that are already written would be a great F-ing start.

Eric said...

wow! You really don't understand libertarianism at all. In fact, you sound like the communist here. You clearly advocate using government-sanctioned violent force against people who choose not to live the way you do. If that doesn't fit the definition of communist--well, nothing does.

It's so clear that you don't understand libertarianism, because you say things like, "You should do a logic exercise and try to eliminate government from everything and see what you would end up with. It would be chaos and anarchy."

Let me explain something to you: Libertarians want LIMITED government. A government that protects a person's GOD-GIVEN right to life, liberty, and happiness--not at the expense of others. Are you so dense as to think anarchy is what libertarians want?

Yes, we libertarians are very frightful people. We don't want to steal and plunder other people's property and productivity the way you "progressives" do. We advocate personal responsibility. And that's spooky!

Your answer to this problem seems to be giving the agencies that screwed all this up in the first place MORE power. And you say I have no rationality?

Insane: Doing the same thing over and over again expecting a different result. It's clear that = "progressives"

Graham said...

"You clearly advocate using government-sanctioned violent force against people who choose not to live the way you do."

Nowhere did I advocate violent force against people. I refuse to debate or even acknowledge someone who misrepresents (LIES) about what I have said. Good day sir. I'm sure you have a wonderfully frustrated libertarian life ahead of you. Good luck with that.

Eric said...

It's a great thing that the world doesn't require your acknowledgment. I didn't misrepresent anything; you just don't see the truth. You haven't even thought about the role of government. Everything the government does, it does with the implied threat of violent force.

Try not paying your taxes and see what happens.

You said, "You should be required to pay more for road tax since you will use the roads more. I would like to see the federal government RAISE the gas tax to a point where it could pay actually pay for our roads."

Let's take your logic to fruition, shall we? People should be REQUIRED to pay more tax for living where they so choose. If a person chooses not to pay by what methods will be used in enforcement? Fines will do no good because the person refuses to pay the original tax. Will it be theft of personal property? And if a person so chooses to protect his/her property from legalized theft, the government will roll in with guns. GUNS!

By advocating a required tax, you sir are advocating government-sanctioned violent force. It's just sad that you absolutely refuse to acknowledge the facts.

I hope you'll be ready too.

Anonymous said...

I think that Eric and Graham need to get a room and get this over with.

Ina said...

Good Job! :)