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Does the Financial Crisis Discredit Libertarianism:

In my view, what we are seeing today is the unwinding of multiple bubbles, starting with the stock market bubble in the late 90s, the housing bubble of the mid-2000s, and the most recent mini-bubble in commodities. These bubbles all have a common source, which was lax monetary policy coming out of central banks. These lax policies were meant to cushion the impact of multiple crises, starting with the crisis in 1998 that arose from the Russian default and the plunge in Asian markets through 9/11. Banking authorities, most notably Alan Greenspan, thought they had inflation under control because consumer price inflation was under control (thanks, largely, to the huge boon to consumers of globalization; consider all the unbelievably cheap "made in China" products on the shelves), and came up with all sorts of rationalizations as to why ASSET price inflation was not really inflation. The incompetence of the relevant authorities in understanding asset price inflation is demonstrated by the fact that Greenspan bought into the idea that housing prices wouldn't fall nationwide because they never had before--forgetting that the underlying increase in housing prices was itself unprecedented. Greenspan obviously believed, against all relevant historical data, that the run up in prices was a natural result of market forces.

In short, we can argue from here to eternity over exactly what pro-free market or pro-regulatory U.S. government policies precipitated the crisis as it specifically developed. But if I'm right that the underlying problem was overly lax monetary policy, which sent false signals to the market regarding the true price/value of money and the amount of real wealth that was being created, it seems to me that even if financial sector/housing policy had been infinitely wise, the bubble would have developed in another sector where policy was less wise, and would have also caused serious economic dislocation when it popped.

Keep in mind also that putting aside all of the debate about what the Bush Administration, Congress, Clinton, et al., did or did not do, the housing bubble was not an American phenomenon, but was as bad or worse in various parts of Western Europe, Eastern Europe, and Asia, which, I'm guessing, have about as broad a range of regulatory policies regarding both housing and finance as one can reasonably expect. The prior stock market bubble was also a worldwide phenomenon, as was, of course, the commodities mini-bubble. This again suggests that the problem was a worldwide misapprehension by central bankers of the consequences of their actions, and not some specific pro or anti free market policies pursued by the U.S. government (not to say that wiser policies couldn't have helped mitigate the damage at some point, especially by cracking down on leverage when there was still time, one of the apparently forgotten lessons of the Great Depression...)

As Eric Posner suggests below, the pure libertarian solution--a free market in money, with no central bank intervention--is not even on the table among "serious thinkers." And I'm not even going to argue that the pure libertarian solution is the right one. But if the blame is accurately placed primarily on central bank policy, then it's rather foolish to consider this a failure of libertarianism or free markets.

It is, on the other hand, an example of the failure of a particular libertarian, Alan Greenspan. Somehow, perhaps for ideological/psychological reasons, he appears to have seen himself as a champion of an anti-regulatory ideology, even though he was the most powerful regulator in the world, and was artificially reducing the cost of money. It would be hard for even the best satirist to come up with a figure like Greenspan, an objectivist who wielded more government power over the economy than any other individual in the world, used that power incompetently, and then allowed himself to believe (at least twice) that bubbles that his policies helped create were the result of the "free market" and needed to be left alone.

UPDATE: One more thought. Libertarians of the utilitarian school often oppose government regulation not because they think that all government regulation is inherently illegitimate, or even necessarily bad, but because on balance they think that decisions made through the political process, or by regulators (like Greenspan) acting with limited information, are likely in most cases to be less sound than decisions made through decentralized market processes. It seems to me that many of the bad decisions made, both on the pro (Fannie, Freddie, Community Reinvestment Act, etc.) and anti (failure to regulate derivatives, leverage, etc.) were not the result of any particular ideology, but the natural result of the political process. One problem with the inevitable "mixed economy" that we live in, and which libertarians would predict, is that the political process will often give us the worst possible result--privatization of profit, socialization of risk.

Related Posts (on one page):

  1. Does the Financial Crisis Discredit Libertarianism:
  2. Does the financial crisis discredit libertarianism?
LM (mail):

It would be hard for even the best satirist to come up with a figure like Greenspan, an objectivist who wielded more government power over the economy than any other individual in the world, used that power incompetently, and then allowed himself to believe (at least twice) that bubbles that his policies helped create were the result of the "free market" and needed to be left alone.

It sounds almost as silly as putting somebody from a horse association in charge of emergency management, and then being surprised when the response to a major disaster doesn't go well.
12.23.2008 6:54pm
frankcross (mail):
Well, I'm no macroeconomist, but it is something of a market failure of concern to libertarianism. Loose money means people buy and produces inflation, unless underlying value keeps up. Usually, people bought across the board and overall inflation would rise, causing interest rates to be pushed down. This time, it concentrated in housing. But the market failure meant:

overly leveraged firms collapsed and risked counterparties' collapse, with much more severe consequences than a bubble need produce, it would seem; and

the market failure directed investment into housing. without it, people would have spent on other things or invested elsewhere. loose money could have caused Americans to invest in true value creation overseas, for example.
12.23.2008 7:03pm
kietharch (mail):
I think it should be mentioned that there have been asset bubbles before
there were central banks. I think it can be argued that lending does not even have to be involved in an asset bubble. If value acceleration is sufficiently exciting people will sell other assets to purchase the selected asset.

I would not argue against the claim tha lending policies were the principal cause of the recent real estate bubble.
12.23.2008 7:13pm
lonetown (mail):
High liquidity brings with it the need for great responsibility. Who knew?

I don't think true libertarians would have used low interest rates as a stimulus, especially to stave off a recession.

Libertarians argued for Government spending cuts which would have helped in the past and now.
12.23.2008 7:16pm
cirby (mail):
It sounds almost as silly as putting somebody from a horse association in charge of emergency management, and then being surprised when the response to a major disaster doesn't go well.

...except, when compared to every other major disaster FEMA has ever responded to, and especially when compared to hurricane responses of that scale, they did extremely well. Press reports aside, the response was amazingly fast considering the amount of ground that had to be covered and the volume of supplies that had to be moved. Try getting a few thousand tons of supplies moved a thousand miles on clear roads in perfect weather with little warning in less than 48 hours some time.

Pretty much everything that went wrong with the Katrina response went wrong at the local and state level.
12.23.2008 8:03pm
marylander:
Hmm. I don't hold a J.D., although I was awarded an MBA by an institution that calls itself with not-to-believed humility in its case studies "a well-known Eastern business school."

My thoughts are these: The government, through its actions, created a phony middle class and then encouraging the granting of credit to these people.

Absent unions, would unskilled laborers be making 100 times what their more energetic and competent fellows do in other countries?

And, as any person who has had contact with government workers might ask, why do we approve the hiring of, at best, disturbed and lazy people.

Finally, why are civil servants represented by unions? I should have thought that these organizations were called into being to oppose those cruel, spat-and top-hat wearing 19th century industrialists, exemplified by Esquire magazine's mascot "Esky," you know, those kinds of rotten fellows who drink champagne and chase chorus girls in their luxurious carriages with a matched set of four splendid geldings.

I wish civil servants all the best, but the public does not oppress them, nor are they entitled to anything more than what an ordinary employer might pay, in terms of compensation, benefits, or protection from market forces.

With the distortion of the labor marketplace, and the federal push to place artificially-boosted persons into home ownership and creditworthiness, it is certainly not surprising that we have arrived at the current situation.
12.23.2008 8:20pm
LN (mail):
AIG was worth $70/share less than a year ago. Today, it is worth about $1/share.

Why? Because of unions.
12.23.2008 8:37pm
Dilan Esper (mail) (www):
Professor Bernstein deserves a medal for his classic description of Alan Greenspan.
12.23.2008 8:50pm
Andrew Hamilton (mail):
Best even-handed assessment of the mess I've read (and I read a lot). I'd add to the toxic side of the mix the self-confident Robert Rubin who often bragged that his ability to weigh costs and risks and benefits allowed him to make right decisions.He joined Alan Greenspan in arguing for hands-off treatment of new markets like derivatives. When Greenspan belatedly acknowledged that he had not foreseen the risk that these markets would not behave rationally, he may as well have been speaking for Rubin too.
12.23.2008 9:44pm
Gabriel McCall (mail):

the pure libertarian solution--a free market in money, with no central bank intervention--is not even on the table among "serious thinkers."


Only if we artificially define "serious thinkers" in a way which excludes everyone who's willing to consider the pure libertarian solution.

You'd have a hard time making the case that Mises, Rothbard, Hayek, Lew Rockwell, and Ron Paul don't qualify as "serious thinkers".
12.23.2008 9:49pm
WishYouWereHere:
Anything, in excess, can be dangerous -- including democracy, capitalism, religion, and libertarianism.
12.23.2008 10:19pm
kurt9 (mail):
These bubbles all have a common source, which was lax monetary policy coming out of central banks.

This was obvious to me even back in 1997 or 1998. I used to talk about this all the time then. But everyone looked at me as though I was crazy.

Greenspan obviously believed, against all relevant historical data, that the run up in prices was a natural result of market forces.

This simplest explanation (and the one I believe) is that Greenspan was a parasite and wanted merely to enrich all of his Wall Street buddies. The fact that he is an objectivist is relevant here, but not for the reasons that the liberal-left weenies give.

Every objectivist that I have met personally, except for one, has used the objectivist philosophy to justify whatever self-dealing activities that they would do no matter what personal beliefs they might have. They use the philosophy to justify being the pricks that they are (anyone who has been in the libertarian milieu like I have will know what I am talking about here).

I strongly believe that Greenspan is an example of one of these people. I believe that he reduced the interest rate below its "natural" level (as well as pushed the BLM into redefining the CPI 3 times during the mid 90's) for the following two reasons:

1) It made his job of promoting economic "growth" easier.

2) It enriched all of his Wall Street buddies.

Based on Occam's razor, this is the simplest explanation for why Greenspan did what he did.

But if the blame is accurately placed primarily on central bank policy, then it's rather foolish to consider this a failure of libertarianism or free markets.

This is also an obvious no-brainer. Of course the liberal-left will do anything to obfuscate this fact in order to discredit free market economics.

It was the flawed policies of the central banks in Asia that created the Asian currency crisis of 1997-2000 in East and South-east Asia.

The correct solution to the problem is not more "regulation" of financial markets, but to allow the market itself, not any central bank, to set interest rates.
12.23.2008 10:22pm
Thales (mail) (www):
There is much wisdom to what DB says, but did "market" interest rates really diverge that much from the Fed's target during these periods? I think it not established by the evidence that we would not have had too cheap credit in the absence of central banking--it's possible, I just haven't seen anyone connect the empirical dots. In other words, without throwing capitalism under the bus, can we agree that it's at least possible that these bubbles could have resulted from the private imperfect pricing of risks (i.e. having little to do with the government one way or the other)?
12.23.2008 10:27pm
Randy R. (mail):
LN: "AIG was worth $70/share less than a year ago. Today, it is worth about $1/share.

Why? Because of unions."

It's hard to understand if this is a joke or you are being serious. AIG has a union? That's news to me.
12.23.2008 10:30pm
LM (mail):
Randy,

He's being sarcastic.
12.23.2008 10:56pm
methodact:
Alan Greenspan knew exactly what he was doing. Things are going swimmingly according to plans, they are pleased as punch with being rid of that bad ol' Glass-Steagall Act. Greenspan is best known for his obtuse brand of obfuscation, particularly in front of congressional hearings, where the precise jargon of his field might have otherwise been used for clarity, instead of confusion. Big clue there. Greenspan and his crowd are no incompetent bumblers, apologetics by doctors of the dismal science, notwithstanding.

Nitwits simply do not steal trillions of dollars, it simply cannot be done.

Iceland had about the highest standard of living, things imploded there in a matter of weeks and Iceland portends what to expect to happen here, as things continue to progress, along their path, by design.

Our commercial real estate market is the next bubble soon to burst, and we will have yet another huge domino effect on the economy when infrastructure is stressed to further extremes, (by design).
12.23.2008 11:11pm
Dan Simon (mail) (www):
These lax policies were meant to cushion the impact of multiple crises, starting with the crisis in 1998 that arose from the Russian default and the plunge in Asian markets through 9/11.

This, I think, is the underlying explanation for Greenspan's error. It's common among economists of just about any stripe--and perhaps, paradoxically, free market enthusiasts more than most, to believe that the economy "should" grow and be healthy, and that a recession is an anomaly resulting from some kind of government mismanagement. Right now, for instance, libertarians all over the blogosphere are offering up explanation after explanation of how government regulation of one sort or another is the cause of all our current economic difficulties.

Greenspan's career certainly reflects that point of view--starting from the crash of 1987, his first (and last) reflex has been to turn on the monetary spigot at the first sign of trouble, to ensure that government didn't "cause" a downturn. As a result, the economy was recession-free for more than a decade and a half after 1991, through several financial crises.

It should now be clear that economic booms and busts are an inevitable by-product of free-market activity, and that attempting to eliminate all busts is like attempting to eliminate brushfires--the accumulated tinder just makes the next one even harder to control. Had Greenspan not tried to "fix" the financial crisis of 1998, the crash of 2000 wouldn't have been nearly as bad as it was. And had he not tried to "fix" the looming post-bubble recession of 2001, we probably wouldn't be in the mess we're in today.
12.23.2008 11:18pm
LN (mail):
Randy, see the comment right before mine.
12.23.2008 11:22pm
So Sue me:
It ain't that simple. Several things are to blame:

- lack of "low-hanging fruit": has sent investment vehicles hunting for every way to squeeze out even tiny gains, and use margin to inflate the volume to create income.

- leverage: Invest 1 dollar, it goes up 10%, you have $110... but a 10% return will have risk. Say risk-free returns are 1%. But if you can lever your investment by a factor of 10, you have a safe 10% return. That's been working for many years. It worked so well, that regulators not to long ago allowed even higher levels of leverage of 30:1 and even 60:1 in some areas.

- rating smatings: A LOT of economy depends on ratings. Think of annuities that for various reasons, *have* to be put in AAA+ investments (i.e. a SDIS). Think of rules that require certain percentages of capital reserves be "protected" by being in AAA+ paper. The ratings turned out to be wrong -- *very* wrong -- and that resulted in a cascade. Imagine what would happen if all credit reports on individuals were suddenly worthless, and no one had a way to determine a valid credit score for you. What would happen to the credit markets? Even if 90% of people have good credit and are a safe risk, no one will lend for fear of lending to that small 10% minority that is a bad risk.

Mark-to-market: Then mark-to-market rules exacerbated the problem. Those written-down values will come back in the next 2 to 3 years, but rules that ensure transparency in a liquid market, make things worse -- much worse -- in a non-liquid market.

- criminal behavior -- or close to it: there used to be a saying in the chemical industry: "the solution to pollution is dilution." In finance, the solution to iffy investments is to bundle them up and hide them in plain sight. Used to be if a bank made a bad loan, they took it in the groin. Now, they put lipstick on the pig, and hide it with bunch of other pigs, and pass it on to someone else.

- lack of a cushion: with hedges and other systems that gave guaranteed safe, but small returns, then leveraged to multiply those small percentage profits to large profits, and a little shady activity, you have a perfect storm, where perturbations that could have been absorbed on their own, combine in a cascade effect. Because of the ratings (wrong) that said the investments were safe, there was nothing held in reserves for a rainy day.

- when all this materialized, the commercial paper market -- which depends on trust and ratings -- snapped shut overnight. In just a few days, payrolls were going to be unmet. Paychecks were going to bounce, and not just for iffy companies, but for LOTS of people, particularly in cyclic industries.

If AIG failed, all hell would have come lose. The AAA+ annuities and guarantees they made allowed the financial system to function efficiently, and actually allow modern commerce to happen. It was THE heart of the modern economy. Think of it like eBay. Without eBay, the unused crap in your garage is only seen by a handful of sad people at a garage sale. You get crappy chose of customers and they get limited selection of goods. The collectors of Alberto Vargas won't see that painting of your great aunt who was in the Zeigfield Follies, and you will never know it is worth $50K. eBay lets the seller find the best buyer, and has a trust system and a clearing house for the $$$.

There are other contributors... easy credit, plain old greed, lack of oversight, etc. Other things you may not think about also contributed... such as going to decimals in the stock market from fractions (yes, that REALLY had a effect in this). But no one can point a single finger. It was a real perfect storm.

Finally, remember that the government is borrowing money at 1-2%, and loaning it out to AIG and others at 8, 10, 12% and more. We are already making a profit. And some real hefty profits will kick in in Obama year 3.... and will give the US a budget surplus (hopefully to pay for the stimulus in Obama year 1).

Now go buy a double-levered index fund like DDM and SSO, and let it sit there for 3 years. Don't even look at it for a year.
12.23.2008 11:39pm
So Sue me:
Ooops.. should have been "Invest $100, it goes up 10%, you have $110."
12.23.2008 11:40pm
American Psikhushka (mail):
In short, we can argue from here to eternity over exactly what pro-free market or pro-regulatory U.S. government policies precipitated the crisis as it specifically developed. But if I'm right that the underlying problem was overly lax monetary policy, which sent false signals to the market regarding the true price/value of money and the amount of real wealth that was being created, it seems to me that even if financial sector/housing policy had been infinitely wise, the bubble would have developed in another sector where policy was less wise, and would have also caused serious economic dislocation when it popped.

The common denominator is an unbacked fiat currency. When a central bank prints money and creates credit it causes the malinvestment and miscalculation that cause severe bubbles.(There are asset bubbles in markets with hard money, but they can't get as bad.) This could not be done with a currency backed with hard assets - you either have the assets or you don't, you can't create them out of thin air to increase their supply.
12.23.2008 11:44pm
American Psikhushka (mail):
frankcross-

Well, I'm no macroeconomist, but it is something of a market failure of concern to libertarianism. Loose money means people buy and produces inflation, unless underlying value keeps up.

Inflation is caused by a central bank printing money and/or creating credit - increasing the money supply. Most libertarians are against this, so it is not a market failure or a failure of libertarian thought. It is a failure of anti-libertarian thought.
12.23.2008 11:50pm
So Sue me:

The common denominator is an unbacked fiat currency

I'm sorry, but that is a crock. None of this would have been avoided, if the US was still on a gold standard or other hard currency backup. In fact, it would have been much worse. This had very little to do with the value of money. Bubbles and a resulting collapses happened even when folks paid in gold coin. Ever heard of tulips... or black roses?
12.23.2008 11:53pm
American Psikhushka (mail):
kietharch-

I think it should be mentioned that there have been asset bubbles before there were central banks. I think it can be argued that lending does not even have to be involved in an asset bubble. If value acceleration is sufficiently exciting people will sell other assets to purchase the selected asset.

There are bubbles in markets with commodity backed currencies, but they don't get as severe. In markets with fiat currencies, inflation increases prices and accelerates the feedback mechanisms you refer to.
12.23.2008 11:59pm
fsfggfs:
LOL. Lew Rockwall and Ron Paul as "serious thinkers" in the same breath as Hayek, Rothbard, and Mises. The latter are rolling in their graves with laughter.
12.24.2008 12:00am
American Psikhushka (mail):
Thales-

In other words, without throwing capitalism under the bus, can we agree that it's at least possible that these bubbles could have resulted from the private imperfect pricing of risks (i.e. having little to do with the government one way or the other)?

See my responses above. When you have a commodity backed currency and can't increase the money supply the bubbles can't get that bad.
12.24.2008 12:09am
American Psikhushka (mail):
So Sue me-

I'm sorry, but that is a crock. None of this would have been avoided, if the US was still on a gold standard or other hard currency backup. In fact, it would have been much worse. This had very little to do with the value of money. Bubbles and a resulting collapses happened even when folks paid in gold coin. Ever heard of tulips... or black roses?

Not at all. As I acknowledged above you can have bubbles with hard currencies, but they don't get as bad. When a central bank increases the supply of money this money has to eventually go somewhere, so where does it go? It goes into assets. In the case of the past ten years or so it went into stocks and then residential real estate.
12.24.2008 12:17am
methodact:
Forensics reveals this to be a global heist, long in planning, when tested for the presence of that classic taggant of moral panic. Moral panic is characteristically used for purposes of public distraction during massive heists, as alluded to in previous posts on other topics. The sheer magnitude and complexity of engineering of that moral panic, with levels of fraud and duplicity necessary to bring it about, all point to the scope and scale of this global heist, fully consistent with what we are seeing now, and is indeed, predictive of much worse to come.
12.24.2008 12:26am
LM (mail):
methodact, evidence?
12.24.2008 1:01am
Wayne Lusvardi (mail) (www):
Most respectfully to author David Bernstein and the other commenters above, I would strongly recommend reading Anthony Downs book The Niagara of Capital: How Global Capital Has Transformed Housing the Real Estate Markets (2007).

It explains how big investment houses invented collateralized mortgage bonds in bond markets and securitized floating stock issues in stock markets as well as sub prime loans to globalize real estate finance after 9/11. Foreign investors were looking for a safe haven to park their money after 9/11. What could have been perceived more safe than U.S. real estate?

The globalization of real estate finance could not have been controlled by the Fed or even much by the regulators. The Tsunami of money that hit our shoreline from foreign countries overwhelmed lending standards already weakened by anti-red lining laws; as well as engulfing regulatory firewalls. Too much investment in real estate dropped interest rates and cap rates, drove down the value of the dollar, spiked the price of gasoline, and led to the crisis we are now facing.

Reading Downs' book infers that there was little the Fed could do to control this. Sub prime loans were expanded to try and soak up this over supply of money. It wasn't just the Fed dropping interest rates that created the real estate bubble - it was an oversupply of foreign capital according to Downs. Moreover, subprime loans under the Community Reinvestment Act were a symptom, not the cause, of the eventual popping of the bubble.

Overlooked in all this is the role that local governments played in supplying zoned land and how state and local affordable housing mandates are a trojan horse for such overdevelopment - see "It Isn't Such A Wonderful Life in Pottersville, er, Pasadena," http://www.pasadenasubrosa.typepad.com, Dec. 14, 2008.
12.24.2008 2:28am
methodact:
LM:

Plenty of evidence, hardly coinkydink, not at all epiphenomenal. I have been writing about this for years and predicting this. This is global. It is now unfolding in its extent, before our very eyes. The myriad apologists will continue to explain it off as gross incompetence even as it unfolds into the nightmare it is yet to become.

There are so many hundreds of films on these conspiracies, some more accurate than others. Alex Jones' Endgame: Blueprint for Global Enslavement (2007), comprehends a lot of it and is a good place to start for learning what they have in mind.

A quick personal anectdote: I knew well what the Bailout Bill was, in those days before the legislators' votes. Even Senators have since come forward explaining that they were threatened with martial law if they voted against it. I have logs of conversations of phone calls in the days before the vote, that I and my sweetheart received from mystery callers, as late as 2:30 in the morning, revealing detailed personal information of things which could only be known from Secret Service or FBI files with mocking taunts that implied murder.

My sweetheart was scheduled for surgery and I decided not to risk her outcome by making waves on what we had discussed was a $700 billion-plus heist. As i told her at the time, $700 billion buys a lot of thuggery, especially in tough financial times, when dirty deeds come dirt cheap. It would be very dangerous to get in the way of that kind of money. But now Bloomberg reports it is into the $trillions.

I have much more personal evidence than that, much of it far more sensitive, spanning many years, which convinces me beyond the shadow of any doubt who is behind all this and just how big it is. It would fill tomes.

So what specific evidence are you referring to?

Those articles critical of the bailout that I have saved and read from so many sources are far too long to list here, but as a sample, those articles I have read and saved critical and leading up to the bailout from just CounterPunch, alone:

alan farago hell to pay.mht
alan farago how the financial crisis occurred.mht
alan maass and lee sustar why not a bailout for the rest of us.mht
alexander cockburn creatures of capital.mht
alexander cockburn how mccain blew it.mht
ali khan meltdown in american markets.mht
anne-marie mcmanus lost in the rhetoric of crisis.mht
bill moyers and michael winship the ny yankees and the u_s_ economy.mht
binoy kampmark how damien hirst got away with it.mht
brenda norrell blowback for black mesa.mht
brian cloughley the unacceptable face of capitalism.mht
carl finamore capitalism on steroids.mht
chris floyd the god that failed.mht
chris floyd the shadow of the pitchfork.mht
christopher ketcham let it collapse!.mht
corey d_ b_ walker the poverty of 21st century progressivism.mht
cynthia mckinney seize the time!.mht
dan la botz the financial crisis.mht
dave lindorff american and china.mht
dave lindorff calling the problem early.mht
dave lindorff hang on to your wallets.mht
dave lindorff the bailout will kill the dollar.mht
dave lindorff the end of the blue chip economy.mht
david estabrook a better bailout plan.mht
david macaray blaming the labor unions.mht
david michael green greed is not good.mht
david michael green where's the repudiation.mht
david vest the great rescue of 2008.mht
eric toussaint is another third world debt crisis in the offing.mht
fidel castro the law of the jungle.mht
glen ford the last hold up.mht
ismael hossein-zadeh misrepresenting the financial crisis.mht
ismael hossein-zadeh the wall street coup and the bailout scam.mht
jeff gibbs just say no! to reverse robin hood.mht
john halle wealth tax now!.mht
karyn strickler the $700,000,000,000 power punch.mht
lila rajiva putting lipstick on an aig.mht
lisa massaciuccoli the shoplifting association of the americas.mht
madis senner why the bailout will fail.mht
manuel garcia, jr_ time for a general strike.mht
mark engler bad money.mht
mary lynn cramer their assets; our debts.mht
michael hudson america's own kleptocracy.mht
michael hudson henry paulson and the new yazoo land scandal.mht
michael hudson rescue for the few, debt slavery for the many.mht
michael hudson scenes from the global class war.mht
michael hudson the abcs of paulson's bailout.mht
michael hudson the dow jones' wonderfully cheesy addition.mht
michael hudson the insanity of the $700 billion giveaway.mht
michael hudson the paulson-bernacke bank bailout plan will the cure be worse than the crisis.mht
mike whitney black monday.mht
mike whitney down for the count.mht
mike whitney full-spectrum breakdown.mht
mike whitney mushroom clouds over wall street.mht
mike whitney the end of friedmanite economics.mht
mike whitney the people vs_ the banksters.mht
mike whitney the point of no return.mht
mike whitney the tumbrils roll at dawn.mht
monica benderman no more.mht
moshe adler bailing out wall street won't save main street.mht
niranjan ramakrishnan freddie, fannie, daddy, nanny.mht
niranjan ramakrishnan oh, henry!.mht
norman solomon requiem for the bailout.mht
oscar gonzalez who's dumber ike's refugees or wall streets.mht
pam martens how the banksters are making a killing off the bailout.mht
pam martens the wall street model.mht
pam martens what wall street hoped to win.mht
paul craig roberts government of thieves.mht
paul craig roberts how inflation works.mht
paul craig roberts the bailout and the smell test.mht
paul craig roberts the bitter fruits of deregulation.mht
paul craig roberts will lehman's fate be america's.mht
peter morici strategies to end the crisis.mht
peter morici the bailout and the economy.mht
peter morici the damage deepens.mht
peter morici toxic lehman.mht
ralph nader who will show some backbone against the bailout.mht
rev_ jesse jackson, sr_ bail out on this bailout.mht
richard rhames a bailout to nowhere.mht
richard rhames hank-ering for a bailout.mht
robert bryce from enron to the current meltdown.mht
robert fantina mccain and the economy.mht
robert weissman getting wall street pay reform right.mht
robert weissman the financial crisis.mht
robert weissman the financial re-regulatory agenda.mht
ron jacobs the predators' bailout.mht
saul landau the chutzpah of hank paulson.mht
sharon smith democrats and corporate bailouts.mht
stephen martin a biological walk down wall street.mht
stephen martin shock and awe in economic warfare.mht
stephen martin the nourishment of idleness.mht
steve conn will nader's warning be acknowledged in the presidential debates.mht
todd alan price bailing out the foes of public eduction.mht
william kaufman shattering the glass-steagall act.mht
12.24.2008 2:34am
fsfggfs:
Methodact, this is not a forum for conspiracy theories (or theorists). Try your luck elsewhere, like Rense or something.
12.24.2008 3:40am
LM (mail):
methodact,

I'm not sure what fsfggfs has in mind, but so long as you comply with the comment policy (it's below the comment box), controversial opinions shouldn't keep you from participating. That said, the particular views you expressed may invite some ridicule or other harsh responses. This isn't my site, so I can only speak for myself, but I'd say if your skin is thick enough to take some abuse, and you can keep your own comments civil and on topic, then don't let any bullying get to you. Just have fun.
12.24.2008 4:11am
methodact:
@alphabet troll:

Hello what, "The Volokh Conspiracy"?

I read O'Connor and Kozinski, whom EV clerked for. I agree with many of EV's posts. I am not jockeying for a job here.

Kerr wrote the seizure manual on computers and engages in much crafting of trial balloons that occasionally wend their way into law, effecting everyone. I am frequently at odds with his designs.

Voting people off the island is rumored to be more in line with the coming Internet2.

I deal with far more flak than ad hominem rants, than most can even imagine. I'm a big boy. I can take it.
12.24.2008 4:36am
fsfggfs:
LM,

I had this in mind:
The New World Order is hundreds of years in the making, via the International Bankers, i.e., the Illuminatti:

There are literally hundreds of films on this topic. The average person has not seen even one. Virtually everything else is mass distraction from the People, dog-and-pony shows and bread-and-circuses to keep the people's attention diverted and with at least a modicum of content.

They have deliberately orchestrated this global economic depression and their aim is World Government, with them in control, with carbon taxes to be paid by every human being directly to them. Alex Jones recites this mantra 4 hours a day on his radio show. These people work towards the elemination of 80% of the world's population. They are eugenicists.
Kooky, as you'll agree. My friendly suggestion was that he'll be better adjusted at Rense.

methodact,

You're being distressingly literal with the name "Volokh Conspiracy." As you might have guessed by now, It's not really a conspiracy, and it's not really an open invitation for conspiracy theorizing.
12.24.2008 5:04am
methodact:
LM:
Thank you for your gracious words.

fsfggfs:
ofc i do read Rense. And I avoided Alex Jones for years, precisely because I too, thought him a kook. He gets 4 hours a day of my precious, precious time now. I also read Glenn Fine's reports. And Bruce Fein for that matter.

I write on other blogs. Perhaps you take issue with my "assuming facts not in evidence" appearance. I know MLA citation style and others and simply haven't always used them.

I am no stranger to intrigue.
12.24.2008 5:41am
MCM (mail):
The comments on these posts regarding libertarianism and the current economic situation have been extremely entertaining. Merry Christmas.
12.24.2008 9:20am
ReaderY:

Greenspan obviously believed, against all relevant historical data, that the run up in prices was a natural result of market forces.


But "irrational" run-ups in prices are natural results of market forces, they happened before modern limitations on markets and occur despite those limitations. They occur for a natural market reason -- different related events take different times to react, so some sectors are reacting to events that took place years ago while others react to today's events, resulting in impefect co-ordination and the equivalent of predator-prey cycles, which similarly prone to spectacular run-ups and crashes for no apparent reason.

Blaming this run-up on particular policies creates an impression that if policies were different, we could have a state where there would never be any run-ups. But we have no emperical evidence to support this, and a lot of theory and evidence suggesting that ecologies thought to have similar dynamics to economise have run-ups and crashes as a regular feature under essentially all conditions.

From a non-libertarian perspective, "good" economic policy might be able to reduce the frequency, magnitude, or effects of boom-and-bust cycles, but it would be naive to expect that any policy could eliminate them.
12.24.2008 11:00am
Patrick22 (mail):
Long interest rates and, thus, mortgage rates are not controlled by the Fed. Witness last year, when Fed Funds went to 1.0% but 30 yr rates stayed at 6.5%. Only in the past weeks, have 30 yr rates fallen as the Gov't buys MBS's. Since the Gov't never before had a program for buying MBS's to drive down mortgage rates, it is hard to see a much freer market than we've had.

The housing and mortgage think is sort of a red herring. The popping of that bubble would have hurt. But it would have only been the 1-2% of GDP that people were expecting a year ago. It was the enormous amount of derivative securities tied to mortgages and everything else and everyone else that is really the problem. That is what has made with a problem worth 3-6% of GDP and frozen credit markets.

These derivatives were completely unregulated. That is why Libertarianism is getting a black eye.
12.24.2008 11:10am
American Psikhushka (mail):
Wayne Lusvardi-

The globalization of real estate finance could not have been controlled by the Fed or even much by the regulators. The Tsunami of money that hit our shoreline from foreign countries overwhelmed lending standards already weakened by anti-red lining laws; as well as engulfing regulatory firewalls.

The Fed controls the creation of money and credit. And when the Fed creates money and credit the central banks in other countries create money and credit so their currencies don't rise against the dollar. This "tsunami" of money is a consequence of other central banks adopting inflationary policies in response to inflationary Fed policy. Many central banks are creating money at a higher rate than the Fed to make sure their currency falls against the dollar to make their export goods attractive. All this extra money has to go into assets somehwere. A lot of it goes into US assets that are by reputation "safe".

Too much investment in real estate dropped interest rates and cap rates, drove down the value of the dollar, spiked the price of gasoline, and led to the crisis we are now facing.

The creation of money and credit by the Fed - inflation - is what drives down the value of the dollar. As stated above, it was all the addition money created by inflationary policies at the Fed and other central banks that flooded into some assets like US real estate and drove the prices up.

Reading Downs' book infers that there was little the Fed could do to control this.

In my opinion (and the opinion of many libertarians/Austrian School economists) the Fed, and reactions to their inflationary policies, are responsible for nearly all of the current financial crisis. Other interventionist government policies are responsible for the bulk of the rest. There are some incompetent, fraudulent, etc. participants in the markets, but they don't cause a fraction of the problems that inflationary central bank policies cause.

Sub prime loans were expanded to try and soak up this over supply of money. It wasn't just the Fed dropping interest rates that created the real estate bubble - it was an oversupply of foreign capital according to Downs. Moreover, subprime loans under the Community Reinvestment Act were a symptom, not the cause, of the eventual popping of the bubble.

As mentioned above, the flood of foreign money can be traced to inflationary Fed policy and other central bank reactions to inflationary Fed policy.

The CRA and other political pressure influenced the banks to make very unsafe loans. The banks were influenced by the competition as well. They saw all the other banks making all this money writing all these bad mortgages, but that isn't an excuse for such horrible decisionmaking and risk management. But they were influenced by government policies and political pressure.

Overlooked in all this is the role that local governments played in supplying zoned land and how state and local affordable housing mandates are a trojan horse for such overdevelopment...

That may be a factor, but the real estate bubble is a textbook malinvestment boom rooted in inflationary central bank policy according to the Austrian School of economics.
12.24.2008 12:13pm
American Psikhushka (mail):
Patrick22-

Since the Gov't never before had a program for buying MBS's to drive down mortgage rates, it is hard to see a much freer market than we've had.

Inflationary Fed policy causes the wild asset booms in the first place. The Fed controls the supply of money and credit, so it is by definition interventionist. As predicted by libertarian thought, these interventions cause problems which require further interventions which cause more unforseen problems and so on... In any case all this isn't even close to a "free market".

Karl Marx wanted a central bank, that tells you how "free market" it is. A central bank is interventionist by definition. They can be less interventionist (less harmful) or more interventionist (more harmful), but they are essentially interventionist, and that is not free market.

It was the enormous amount of derivative securities tied to mortgages and everything else and everyone else that is really the problem.

The problem is the loans going bad. The reason for the large amount of bad loans is malinvestment. This malinvestment was caused by inflationary Fed policy and other bad government policy. There are other factors in the mix - financial shenanigans, fraud, bad risk management, bad risk management models and other mathematical models, horrible incentives, etc. - but the roots of the problem are Fed and government policies.

Regulation would not solve that. Unless your regulation was to get rid of the Fed and leave a free market for money and credit. Or at least requiring a backed currency.
12.24.2008 12:41pm
methodact:
I once met the late John Houseman, who played Law Professor Charles W. Kingsfield, Jr., in The Paper Chase. Houseman had also been Robin Williams acting teacher at Julliard.

I suggested to Houseman that he would probably get far more exposure if he did commercials, and shortly thereafter, he began fronting for Smith Barney, with the tag line, "We make our money the old-fashioned way, we EARRRNNN it".

I wonder what Houseman would think of how our many beleaguered financial institutions "earn", these days.
12.24.2008 12:54pm
einhverfr (mail) (www):
I think that one of the big problems that Bernstein gets at is the failure of political ideologies to come up with a systemic approach to what areas need particular regulation and even common ownership and which areas do not.

I consider myself a free market capitalist and a semi-libertarian. I also think that some things should be nationalized and some operational activities by our government privatized. My views are based on the observation that natural monopolies require too much regulation and so private ownership of these tends to be a farce.

In the financial system, there are a number of reasons why regulation is important:

1) Just as in the 1920's, most people are not financially sophisticated enough to understand what they are getting into in unregulated securities. If you deregulate the financial sector too much, you put everyone's savings accounts at risk. This too can create problems regarding the banking system because it means less capital available for loans.

2) The financial system IS a major piece of business infrastructure, and financial instruments (wire transfers, checks, money orders, etc) are important for any business. Leaving everything to private devices could cause more massive disruption than we have yet seen. This is why FDIC is an absolute necessity.

I am not aware of any unregulated loan system which has been viable in the long-run. The more Libertarian-like economies are those which have tended to use bulk precious metals and/or livestock as primary currency and relied on reciprocal gifts instead of loans.
12.24.2008 2:30pm
American Psikhushka (mail):
methodact-

I wonder what Houseman would think of how our many beleaguered financial institutions "earn", these days.

Careful there, methodact. You sound like you are supporting the long defunct and dangerously incorrect "Labor Theory of Value". You do realize that when people earn a return on their investments that they did earn it because they put their capital at risk, don't you? That nearly the entire financial system of the developed world is built on people investing their capital and earning a return on it? That basically the technologically advanced civilization we have today owes its existence to those investment principles?

I'm not defending financial frauds and cons. But the principle of investing and earning a return on that investment has been a very beneficial one to all of mankind. (Of course we're also talking about legitimate businesses that don't violate anyone's rights here as well.)
12.24.2008 3:59pm
Portland (mail):
The first question one must ask, before determining whether recent events discredit libertarianism, is what events or evidence would be accepted by its adherents as discrediting libertarianism.

For many libertarians, the ideology is what Karl Popper calls a non-falsifiable system; to believers, any set of facts can be interpreted to support the theory; like historical determinism, or astrology.

Before I can get excited over whether a particular state of affairs discredits libertarianism, I need to know whether, in the opinion of the people I'm talking to, any state of affairs possibly could.
12.24.2008 4:05pm
Portland (mail):

Inflationary Fed policy causes the wild asset booms in the first place. The Fed controls the supply of money and credit, so it is by definition interventionist. As predicted by libertarian thought, these interventions cause problems which require further interventions which cause more unforseen problems and so on... In any case all this isn't even close to a "free market".


A fact free-market purists conveniently forget when the economy is growing and generating wealth. Yes, you will always be able to say the economy hit the skids because it wasn't libertarian enough, always; because there is not now, nor has there ever been, a society foolish enough to impose a purely libertarian economic system (if such a thing is even possible.)

I might, with equal logic, argue that we should make all important economic decisions by means of rulings by practitioners of extispicy; there is no evidence that such a system doesn't work.

You might argue that there is no evidence that such a system would work, and you'd be right. But some libertarians want to both ways; when things are bad, the economy is not libertarian enough to pass judgement on libertarianism; when things go well, they feel able to divine that it is because the system in question is more libertarian than it might be. This double standard in evaluating the mixed economies that predominate in the real world supports the sort of non-falsifiable system I alluded to above.
12.24.2008 4:21pm
American Psikhushka (mail):
einhverfr-

Just as in the 1920's, most people are not financially sophisticated enough to understand what they are getting into in unregulated securities. If you deregulate the financial sector too much, you put everyone's savings accounts at risk.

Even with tons of government regulation they weren't able catch Madoff (even when tipped off) and numerous other financial shenanigans out there. I think allowing the industry to self-regulate is a big part of the problem. But I don't think government regulation is the solution - that would mean more tax drain on the private economy. Maybe change the laws so that private attorneys could sue more effectively. Brokers, etc. should maybe be a little more nervous about malpractice suits, like doctors. The brokerages would certainly be more careful after some lawsuits.

I agree there is a huge lack of financial education out there, it's a real problem. (Although throwing money at public education is unlikely to fix that.)

This too can create problems regarding the banking system because it means less capital available for loans.

I think that concern is somewhat exaggerated. The natural economic cycle is supposed to periodically instill credit discipline. Otherwise you have too much money going to loans and you have malinvestment - see the sock puppet during the tech boom, etc.

The financial system IS a major piece of business infrastructure, and financial instruments (wire transfers, checks, money orders, etc) are important for any business. Leaving everything to private devices could cause more massive disruption than we have yet seen. This is why FDIC is an absolute necessity.

You're somewhat contradicting your own point here. The payment methods you mention - wire transfers, checks, money orders, etc. - are all run by the private sector. If the FDIC wasn't there banks would buy private insurance and it would become a selling point to compete on: "XYZ bank only insures accounts up to 100K, we insure accounts up to 250K", etc. As it is the existence of the FDIC might be allowing banks to be too reckless.

I am not aware of any unregulated loan system which has been viable in the long-run. The more Libertarian-like economies are those which have tended to use bulk precious metals and/or livestock as primary currency and relied on reciprocal gifts instead of loans.

I'm not sure what you mean by "unregulated". I think you're equating libertarianism with economies or societies that have no legal system. Most libertarians support legal systems that address force, fraud, contract disputes, etc. There is just debate among libertarians as to how much the government should be involved in that.
12.24.2008 4:45pm
American Psikhushka (mail):
Portland-

For many libertarians, the ideology is what Karl Popper calls a non-falsifiable system; to believers, any set of facts can be interpreted to support the theory; like historical determinism, or astrology.

Not at all. I'll agree that there are no purely libertarian economies out there. However there is a continuum between more economic freedom and less economic freedom and the countries with more economic freedom tend to be more wealthy and enjoy higher standards of living. See the Index of Economic Freedom. (And note I said "tend", it's not exact.)

Before I can get excited over whether a particular state of affairs discredits libertarianism, I need to know whether, in the opinion of the people I'm talking to, any state of affairs possibly could.

There certainly are states of affairs that would cause me to question libertarianism. For example if libertarian economic policies caused the stagnation, declining living standards, and often starvation that you see when communist policies are enacted that would certainly cause me to question them.

But I think a lot of the confusion is because many people don't understand libertarianism. Part of this is due to the intentional efforts of the mainstream left and right, because it tends to piss both sides off.
12.24.2008 5:01pm
American Psikhushka (mail):
Portland-

A fact free-market purists conveniently forget when the economy is growing and generating wealth.

You obviously weren't reading libertarian materials when things were "good". Libertarians have been railing against the Federal Reserve and their policies and warning that they were causing and going to cause major problems for decades. And that period contains a number of periods when times were supposedly "good" economically.

...because there is not now, nor has there ever been, a society foolish enough to impose a purely libertarian economic system (if such a thing is even possible.)

Sheesh, you seem to have a lot of vitriol there. The fact is that the countries that enact policies that are the closest to libertarianism tend to have higher standards of living. See the Index of Economic Freedom that I linked above.

But from the vitriol I think you have a misconception of what libertarianism is. How are you defining it? Do you realize that the inflationary policies the Fed pursues(which is the thing libertarians rail against the most) is really a hidden tax that tends to hurt poor people especially?

I might, with equal logic, argue that we should make all important economic decisions by means of rulings by practitioners of extispicy; there is no evidence that such a system doesn't work.

Except that I linked pretty extensive and exhaustive evidence above that those countries that have economic policies the closest to libertarianism - higher economic freedom - tend to have higher standards of living.

This double standard in evaluating the mixed economies that predominate in the real world supports the sort of non-falsifiable system I alluded to above.

I think the "double standard" is your perception. Libertarians rail against policies that are detrimental to economic freedom whether times are good or bad.
12.24.2008 5:28pm
methodact:
American Psikhushka:

Yes, the division of classes, the wage earners, and those who live off the gains from investment capital, whose money works for them.

It is said that the only noble purpose for attaining a life of leisure is in order to devote oneself fully to the pursuit of knowledge. When one has attained sufficient-enough resources to work for him, then one can become free in time enough to pursue real study, the liberal arts.

Those relegated to eeking out a living generally have to settle for those opinions spoon-fed to them from their surroundings.

I found Aaron Russo's 2006 documetary film, America: Freedom to Fascism, quite interesting.

Russo particularly discusses income tax versus capital gains tax inequities.

I used "earn" with a sense of irony given recent revelations of the giant Ponzi schemes masquerading as investments out there.

Um, American Psikhushka, what a heavy-duty nick you sport there, yet another fright out there.
12.24.2008 7:53pm
einhverfr (mail) (www):
AP:

I think that concern is somewhat exaggerated. The natural economic cycle is supposed to periodically instill credit discipline. Otherwise you have too much money going to loans and you have malinvestment - see the sock puppet during the tech boom, etc.


I am looking at a different angle here. The fact is that businesses very frequently borrow money to expand operations. This money is in part handled by bank loans which are in part funded by customer deposits. If you discourage customer deposits, it is harder for businesses to borrow money for operational expansions.

The fact though is that banks are very heavily regulated. I consider heavily regulated businesses to be essentially branches of the government with outsourced, private operational centers. This is why I think that natural monopolies are problematic (because one ends up with privately owned businesses which are, by necessity, heavily controlled by the government).

Note that even in the older Scottish banking system there were heavy regulations intended to ensure that deposits were guaranteed. This was usually accomplished by ensuring that wealthy individuals could be held personally responsible, and these were functionally equivalent to the sorts of regulations we have today regarding fund availability (in the sense of requiring a certain amount of liquidity to the operation). Maximum and minimum interest rates are usually set by law, and there are large sets of regulation which are unavoidable.

It seems to me that the only semi-deregulated banking systems have worked were those which would NOT allow for limited liability or full corporate participation in the market. In short, every one of the successful systems I can think of have required as a fundamental rule the idea that the bank MUST be able to tolerate its risk, and MUST NOT default on depositors. Either the government does this as a partner or they ban corporations form participating (and only allow private individuals with unlimited liability to participate).
12.24.2008 10:15pm
American Psikhushka (mail):
methodact-

It is said that the only noble purpose for attaining a life of leisure is in order to devote oneself fully to the pursuit of knowledge. When one has attained sufficient-enough resources to work for him, then one can become free in time enough to pursue real study, the liberal arts.

Well that's one take on it that I agree with somewhat. In my opinion it would be just as commendable to start new businesses (creating jobs and increasing societal wealth along the way), create or innovate new products and inventions (possibly raising standard of living, increasing efficiency and productivity, etc.), and the like. But of course each person's life is their own to live as they see fit.

I used "earn" with a sense of irony given recent revelations of the giant Ponzi schemes masquerading as investments out there.

I agree.

Um, American Psikhushka, what a heavy-duty nick you sport there, yet another fright out there.

Yes, unfortunately parts of the practice of medicine which is supposed to "do no harm" and benefit mankind seem to be being turned into mechanisms by which mankind can be oppressed, exploited, and controlled.
12.25.2008 11:51am
American Psikhushka (mail):
einhverfr-

Note that even in the older Scottish banking system there were heavy regulations intended to ensure that deposits were guaranteed. This was usually accomplished by ensuring that wealthy individuals could be held personally responsible, and these were functionally equivalent to the sorts of regulations we have today regarding fund availability (in the sense of requiring a certain amount of liquidity to the operation). Maximum and minimum interest rates are usually set by law, and there are large sets of regulation which are unavoidable.

I'm not an expert in banking and the history of banking, but the wealthy individuals you mention seemed to fill the role of private insurance. I don't see a reason why that function could not be performed by modern day insurers.

It seems to me that the only semi-deregulated banking systems have worked were those which would NOT allow for limited liability or full corporate participation in the market. In short, every one of the successful systems I can think of have required as a fundamental rule the idea that the bank MUST be able to tolerate its risk, and MUST NOT default on depositors. Either the government does this as a partner or they ban corporations form participating (and only allow private individuals with unlimited liability to participate).

I think private insurers and the market would handle those concerns. Private insurers could insure deposits, and the market would weed out the banks that were reckless in operation, risk management, etc.

Things would also change if hard currency, or a free market in currency were established.
12.25.2008 12:37pm

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