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Read a book that had the word shrugged in it---> the nytimes says regulators at SEC shrugged---> Therefore, Atlas Shrugged caused the current financial downturn.
http://www.reason.com/blog/show/128704.html
No. There are other ways to encourage and subsidize homeownership for a certain class of borrowers; there are no other ways to have no regulation on a class of derivatives.
Anyway, if the fact that an anti-regulatory ethos enabled effective over-leveraging that turned what would have been a bad housing bubble into a global financial near-meltdown doesn't at least tend to falsify libertarianism, it would be interesting to know what would.
The worst we have learned in the present case is that sometimes the hesitancy to further regulate markets that have grown out of a set of dangerously ill-conceived policies can make things worse.
The argument that, as long as we're going to continue making dogs rabid by injection, the practice of not shooting dogs endangers us all, is certainly funny. But, obviously, it wouldn't debunk the ASPCA.
Your pointing out of inconsistencies and silliness on the left a la Weisberg is well taken, but your credibility falls at least as far or further when you claim that there is nothing but government encouragement of home ownership behind the current meltdown.
Will did not make this claim. Read closer. Hint: Will's claim is an example of an INUS condition:
...remove the idea that the government ought to encourage and subsidize homeownership, and what do we have left of the main forces behind the financial crisis? I’d say we have nothing left. So there’s our culprit, right?
...and this:
The worst we have learned in the present case is that sometimes the hesitancy to further regulate markets that have grown out of a set of dangerously ill-conceived policies can make things worse.
...and did not say anything to the effect that govt. encouragement of home ownership is "an insufficient but non-redundant part of an unnecessary but sufficient condition" for the financial collapse, I'm disinclined to believe that my understanding of Will's position is an example of failure to "read closely". Your helpful hint amounts to an encouragement to reach conclusions that are completely unsupported by the evidence in front of me. Don't take it personally...I'm equally unwilling to assume Will is a member of the Flat Earth Society on the basis of what he's written here.
I'm not really interested in fighting straw men, so if you can clearly demonstrate that that's what I'm doing I'd appreciate it.
Remove the presence of a lit match, and what do we have left of the main forces behind the forest fire? I’d say we have nothing left. So there’s our culprit, right?
Remove the dry underbrush, and what do we have left of the main forces behind the forest fire? I’d say we have nothing left. So there’s our culprit, right?
Remove the absence of firefighters, and what do we have left of the main forces behind the forest fire? I’d say we have nothing left. So there’s our culprit, right?
Each of these factors is an insufficient but non-redundant part of an unnecessary but sufficient condition for the forest fire. Similarly, there are a large number of potential INUS conditions related to the subprime mortgage crisis. The absence of any one of these conditions may have prevented the entire crisis, leaving us with no crisis and a number of insufficient partial conditions.
As for the other stuff, it's really not that complicated. 40 to 1 leverage is a bad idea. Especially when the 1 stands for 1.5 trillion dollars. It's also a really bad idea to allow such highly leveraged "assets" to mingle in an opaque fashion throughout the entire financial system in what amounts to an enormous game of three card monte. Sylvester McMonkey McBean, of star-bellied sneetches fame, was an amateur by comparison.
Your argument seems to be that if only tip of this huge inverted pyramid had been built better then it would be obvious that building pyramids upside down makes sense. Unfortunately, systemic risk doesn't work like that.
But we could convert your dog example into a viable analogy if we consider the veterinary care of dogs generally, which consists in various human-engineered interventions into highly complex, natural, autocatalytic, self-organizing canine systems.
Call "Canesians" the faction that believes there are occasions where such interventions are indicated. Call "Canitarians" the faction that believes such interventions on balance are deleterious to the health of dogs and therefore should be avoided per se.
Suppose the Canesians mount a program of booster shots for dogs with weakened immune systems. Unhappily, some veterinarians fail properly to sterilize their needles (even though it is well known such laxity imposes severe risks). This causes rabies to be spread from infected to noninfected dogs. It would be true to say that absent the Canesian scruple that veterinarians ought to encourage and enhance canine immunity, this instant multiplication of rabies infections would not have occurred.
It turns out, however, that the incidence of rabies itself would have been far lower had a more robust program of rabies vaccination been implemented. But as a matter of course, the Canitarians had lobbied against such vaccinations, on the usual grounds; in this they had the sympathy of the head of the AMVA, so their lobbying efforts met with success in this particular case. So: No rabies vaccination program. As a result, (1) the initial multiplication of infections due to the lack of sterilization was much more widespread than would otherwise have been the case, and (2) there remains an elevated risk of subsequent infections (since there are more dogs that aren't vaccinated than there otherwise would have been).
End analogy.
Caveats:
1. Our confidence in medical interventions is higher than our confidence in economic interventions. (But query whether this confidence differential is all that justified, in terms of both possible underconfidence regarding economic intervention and overconfidence regarding medical intervention)
2. Our ex ante knowledge of the efficacy of rabies injections is higher than our ex ante knowledge of derivatives regulation.
3. The analogy imperfectly maps the mechanisms of spread.
4. The analogy fails to map the relationship between mortgages and secondary financial instruments.
5. ?
Nonetheless, even when you modify the background assumptions of the analogy with those caveats in mind, I'd still say the analogy shows the Canitarian position is to some degree discredited. Giving aid to dogs with weakened immune systems (or borrowers with weaker credit) is a desirable and arguably achievable policy goal. We have some confidence that certain prophylactic measures (rabies vaccination, derivatives regulation) can minimize the risk that local failures in planning and implementation will infect the broader population (other dogs, other market sectors and global markets). Thus, while the errors attributable to the Canesians here seem contingent, the errors attributable to the Canitarians are essential (because there is no other way to have no prophylaxis).
So, to bring it back to your analogy, what the Canitarians are saying is that the vets should lay off the dogs because
(a) they are drunk and Parkinsonian and likely to botch the vaccinations
(b) even more, *they are the principal carriers of rabies in the world*.
And it occurred within a regime that implements a body of regulation. So libertarian, zero-regulation doctrine simply isn't apt. The extant regulation is a political reality. The rational policy question, then, is what action to take at the margin. And it doesn't appear that salutary policy action would have required anything like God-like omniscience; indeed, the argument is that rational and economically beneficial action probably would have been taken had it not been for the conviction that regulation should generally be avoided.
Being someone with a physics and engineering background, I very well appreciate the constructive role non-linear dynamics can have in complex systems. Like with the human body, I like the idea that the body should be left to itself and it will function well most of the time. However, as technology improves we humans have found it useful to measure, intervene or downright replace parts of broken anatomies with something artificial--our solutions tend not to be perfect, and can leave us wanting for the original body once again. That equation however changes as technology improves. What will happen when artificial eyes are developed that are demonstrably better than what nature has ever provided, and impose a relatively low cost of adoption and maintenance? What about better, stronger and faster limbs? I remember as a child thinking, "Yeah, it would be cool to be Jamie Sommers--the Bionic Woman!"
As information technologies improve and the cost of their adoption and maintenance decreases, I am all for inserting certain types of artificiality into our economic system such as improved measuring systems (were the cost of Sarbanes-Oxley lower!), damage control systems and prevention systems if the efficacy/cost equation be optimized.
So, who is for complete non-intervention of your personal health?
I also wonder if a small, geographically tiny and culturally uniform society like Hong Kong is a particularly good test? i.e, perhaps the "cultural contract" in HK substitutes for the "governmental contract" of the U.S.?
And freedom of the press isn't stellar, it suffers setbacks, mostly perhaps in the form of self-censorship rather than open repression. Also note the immigration rate: just 0.5%, mostly mainlanders re-uniting with their families. The deal with Hong Kong is that you can be rich, but not free. We just don't see hordes of people from around the world banging to get into Hong Kong.
I would still rather be here in the USA, where the immigration rate is 10%, and despite all our obvious issues, people from around the world are still lining up to get in. This is telling, yes?
Moral of the story: cross-country comparisons are difficult.
I suspect that certain forms of increased regulation to our free market system may be effective (such as transparency regulations, otherwise known as "measurement") if their associated costs can be minimized (e.g., through improved information technology infrastructure). I also suspect however that even this can have a limit as we eliminate the measurement problems we may find ourselves face-to-face with the uncertainties of genetically constrained human psychology.
Perhaps the next advance will have to await wide spread genetic reprogramming of the human species.
I note that neither of the above examples would qualify as a large, diverse, industrial economy. Supposing that no successful examples of a modern, diverse, libertarian economy and society exist, the explanation would seem to lie on a continuum of two poles. Either 1) successful modern economies almost inevitably create large, interventionist governments because of evolutionary traits of humans and human society, or 2) there is a certain level of interventionist government required to support the long-term functioning of such societies. Which is the chicken, and which the egg?
Of course, these cannot be original thoughts. There must be fairly extensive literature in the libertarian canon discussing these exact issues, and I'm hoping you all can point me in the direction of the most concise examples.
Hong Kong, as a "special region" of Communist China, certainly couldn't be called libertarian. It is also a former British dependency.
"So when the bargaining outcome leads to instability and massive structural failure, the correct response is simply to attempt to ensure that, in the future, people who believe certain things are not key players. This is preferably accomplished by ensuring that, in the future, no one of significance believes those things at all...Is there any reason to believe this is not Jacob Weisberg’s way of thinking? Is there any reason not to think it is monumentally stupid?"
Of course it isn't monumentally stupid, if the ideas he is discussing he believes to be bad ideas. Naturally, the world would work better if those in control didn't adopt bad ideas. Having no Marxists is a good thing. Having fewer is better than more. Same, in Weisberg's mind, with libertarians.
Secondly, it is commonplace to consider some groups to be useful foils. Republicans and Democrats frequently will acknowledge some benefit to the other party continuing to exist, although in a minority status, to prevent corruption or to guard against their worst excesses.
Whether this is particularly applicable to the subject matter is another question. But as a matter of logic, it isn't stupid in the least.
Basically what Jacob is saying is that if we had regulated certain derivatives than this crisis would never have happened. The main problem with his argument is that he does not give any kind of explanation as to why this is so. He doesn't even give an example of a regulation that would have prevented the crisis. I am completely at a loss to understand his argument.
Nobody on this blog has given a single argument as to how regulation could have prevented this crisis. Let me explain what this type of argument would look like. You would have to give some narrative as to why this crisis occurred and then present some alternative narrative with some specific regulation X and explain how regulation X would have prevented this problem. Even better would be to give a real world example. Allow me to give a prototype argument.
I think that the whole crisis is due to government encouraging very risk mortgage lending practices like zero LTV and regulations that prevent prepayment penalties and encourage non-recourse or jingle mail. In America banks cannot penalize prepayment whereas in Canada they can and in Canada their is recourse for mortgage defaults. Canada has no crisis and America does. Hence deregulation of mortgages to allow prepayment penalties, recourse in cases of default and regulation to eliminate zero LTV would have prevented this crisis.
The argument above is pretty crappy but its light years ahead of Jacob's argument. I have given an actual regulation that I think caused the crisis and I have given a real world case where the regulation is not present and there was no crisis. Jacob never even told us what regulation he had in mind. I guess we were supposed to magically read his mind and figure out the regulation ourselves. His argument is incomplete.
You're still thinking "subprime". That's neither necessary nor sufficient to have gotten us to where we are now.
Your a moron who was born from a frog. Why should we trust someone born from a frog. Obviously your frog nature was both necessary and sufficient to cause this mess. You bastard.
I think the argument above has about the same amount of content as your argument. Which is to say it has no content.
- Limits on the percentage of mortgages a bank can securitize, or a requirement that a bank must own (must not sell along) some percentage of the assets it securitizes.
Similar requirements for mortgage lenders. They must not be allowed to pass along all risk. They have to be incentivized to limit risky loans.
- Limits on the complicatedness of derivatives (e.g. disallowing CDO's-squared)
- An exchange for derivatives that clarifies the exposure of individual players and the market as a whole.
- Credit rating reform: regulations to ensure that rating agencies have incentives to properly assess risk of securities. One intriguing idea is to mandate that pay to ratings agencies is in some way conditional on the accuracy of the assessment.
There are probably many other possibilities. I'm sure there will be a vigorous debate over the next few years.
Now the next step is to show that the regulations would actually be beneficial and enforceable. I don't think the complicatedness regulation is enforceable since it requires a measure of complicatedness. Regulation 2 I agree with but I don't think it would have prevented this crisis. Regulation 3 also would not prevent anything because it penalizes after the fact. There is also the possibility that all these regulations could make things much worse.
Naming regulations is the first step. The next step is to give real world or theoretical evidence of the effectiveness of the proposed regulation.
Interestingly you avoided any regulations that would limit the defaults and riskiness of mortgage backed securities. Like for instance allowing prepayment penalties, forbidding ninja and zero LTV loans, allowing recourse mortgages (no more jingle mail). There is real world evidence of the effectiveness of these types of regulations, namely Canadian banks.
Clearly now - the email & IMs have been released - a significant part of this is plain fraud on the part of the rating agencies. When they went public, they went from neutral, independent bodies to "service companies," being paid by instrument sellers for ratings. Thus management allegedly forced employees to positively rate instruments despite the real risk, and to neglect to fix known errors in the ratings model.
Complete change of business model, and one that compromised the entire system. If you want to ask where new regulation should be, it should start there: to assure the independence and neutrality of ratings.
Calling each other "morons" and the like is just counterproductive. There was real crime here. The financial system is grown-up stuff for the real world, not simply signaling one's political allegiances. Please set aside your political biases and examine the facts as they are coming to light. Otherwise this discussion is pointless.
The moral hazard now comes into play when the government bails out these institutions. Even having a concept of "too big to fail" is a moral hazard, as that encourages this type of behavior with the thought always in the back of their minds that if it goes south, they will get bailed out anyway. In a real libertarian world, people would be held accountable for their risks, and therefore people would be more cautious when taking risks, or not take them at all.
It is known that regulatory reform of the mortgage GSEs was proposed and opposed and defeated. Was Barney Frank just ignorant of the potential problems?
Or was he part of the bargain made to allow lenders to find a way to make money off of bad loans to fulfill policy goals?
The fact of the crisis occurring in a regime of extensive regulation tells us that having a regulatory system is no guarantee of effectiveness and further, can manage to coordinate problems into a crisis of GSE proportions.
Proponents of regulated economies like to cite some ideal state where the regulatory regime works in harmony with the market producing optimal results, even after failure after failure. Recall that a large justification for the creation of the FED was to prevent big depressions. The FED was established in 1913, sixteen years before the market crash of 1929.
It seems obvious in citing the mistakes of the FED board and other interventions of government at the time that they did not know what they were doing and thus did not comprehend the nature of markets.
Seventy-nine years later, they still don't.
They're all Keynesians now.
This does not address the desirability of a regulatory environment except in the sense that the knowledge to create proper balance can be lacking, giving rise to the constant need for further "adjustment".
A politically/centrally regulated economy is not stable. The feedback loop has to much delay and distortion.
I bounced here off Hit 'n Run. It impresses me that the Weisberg column has inspired a small flood of excellent libertarian short-form essays, yours included.
It would be of value to have columns like Weisberg's come out on a regular basis, to hone the cadres' skills and build the literature. It would be worth paying for this. Lucky for us, there are no shortage of volunteers providing targets.
And, your rabid dog analogy was golden!
Keep up the good fight!