Will Wilkinson - Latest Comments in The Principles of Weisbergian Political Economy

Re: The Principles of Weisbergian Political Economy

NicoleTedesco — Tue, 28 Oct 2008 12:40:39 -0000

Michael, very well said! (I love the Theodoric of York example. I haven't thought of that character in years! It makes the point well.)

Re: The Principles of Weisbergian Political Economy

strangedoctrines — Tue, 28 Oct 2008 12:34:33 -0000

Hi Nicole, one other thing I had in mind was that medical intervention has an extensive history of, well, f***ing up on the way to discovering what kinds of interventions actually work. (This is somewhat related to the point about improving technologies.) The success rate of Theodoric of York might have led some to posit an a priori principle that nonintervention is always better; but now we know that would have been a mistake, perhaps caused by a toad or a small dwarf living in the stomach. In sum, the appropriate induction to draw from the history of science and technology seems to be that cautious experimentation is a better bet than principled nonintervention.

Re: The Principles of Weisbergian Political Economy

NicoleTedesco — Sat, 25 Oct 2008 14:21:39 -0000

The pretty-near centralized planning of the United States' economy during WWII was successful for the time, but fell apart by the Ford era (mid-1970s). Nixonian price and wage controls were not effective. Ford's "WIN" campaign was a joke. It could be that non-capitalist systems can be effective under some circumstances, for some periods of time, with some cultures, under certain scales.

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.

Re: The Principles of Weisbergian Political Economy

NicoleTedesco — Sat, 25 Oct 2008 14:01:13 -0000

Michael, I find I am partial to your "Canesians" versus "Canitarians" argument perhaps because I have been partial lately to using medical analogies when describing the current financial crisis to people. It is fashionable at this time for people to attempt to discredit free market economics because something more "rational" would not have let the current crisis happen. My response is that planning so far has been quite rational and scientific if you consider the time dependency of our macoeconomic models: Like Black and Scholes, the model is good most of the time--except for those relatively rare, pesky up-or-down spikes of activity. I liken this to the fact that our own bodies work pretty darned well a vast majority of the time except for those pesky heart attacks or strokes that would kill you. What to do about those heart attacks or strokes? We can take measures to prevent them. If those measures are of uncertain efficacy, such as the consumption of red wine, if the cost is low "it doesn't hurt to try." If the preventative measures are of high certainty, such as regular exercise, then we try our best to implement them regardless of the cost (this doesn't account for the cessation of cigarette smoking however). We can also try to measure our physiology for signs of an impending heart attack or stroke so that we can either take evasive measures or prepare ourselves for prompt corrective action should the event occur. We can also work on effective methods for damage control after the event. As far as preventive measures such as the difficulties of cessation of cigarette smoking are concerned, this can serve as an analogy for the effects of politics in our economic system.

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?

Re: The Principles of Weisbergian Political Economy

ChrisH — Sat, 25 Oct 2008 13:34:08 -0000

Will,

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!

Re: The Principles of Weisbergian Political Economy

Sam Grove — Sat, 25 Oct 2008 02:31:42 -0000

I think what can be determined from this is that in a regulatory environment, a certain balance is required. If tilted too much one way, the business environment can be stifling, tilted too much the other way, the business environment can get too "exuberant".

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.

Re: The Principles of Weisbergian Political Economy

Sam Grove — Fri, 24 Oct 2008 23:38:22 -0000

We might consider that failure to regulate these 'securities' was willful and part of a bargain to 'encourage' lenders to make 'sub-prime' (read "bad") loans.

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.

Re: The Principles of Weisbergian Political Economy

Robbie — Fri, 24 Oct 2008 23:00:55 -0000

I think the point here, like Will said, is that the fuel behind this fire was the mortage practices encouraged by the government. However, I think it could also be argued that though this was the problem this time, it needn't have been since there probably should have been more regulation in certain areas of the financial market. That is what Will was trying to say I think. If libertarians learned anything, it is that maybe there should have been more regulation in this case. Libertarians are not anarchists, and to say that something caused by the free market dooms libertarianism is ridiculous.

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.

Re: The Principles of Weisbergian Political Economy

assman — Thu, 23 Oct 2008 18:32:14 -0000

Great you have named some regulations. That step 1. Progress.

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.

Re: The Principles of Weisbergian Political Economy

mk — Thu, 23 Oct 2008 17:26:56 -0000

A few examples of possibly beneficial regulations:

- 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.

Re: The Principles of Weisbergian Political Economy

assman — Thu, 23 Oct 2008 15:32:13 -0000

You also failed to address my argument. I was giving a prototype argument and claiming that Jacob's argument was insufficient. Your argument is insufficient for the same reasons. Namely all you have argued (without proof) is that "the system" is enough to lead us to these problem because it privatizes profits and socializes losses. First of all you are already wrong. There have been speculative crises where the government gave absolutely no help to the speculators. So it is possible to have these type of problems in a market system even when losses are not socialized! Secondly you, just like Jacob have failed to provide an alternative system that would have prevented this crisis and you have failed to explain how regulation could prevent this crisis.

Re: The Principles of Weisbergian Political Economy

assman — Thu, 23 Oct 2008 15:23:54 -0000

How exactly do you know subprime is neither necessary nor sufficient to have gotten us into this situation? Your argument is non-existent. I can also make argument without giving reasons:

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.

Re: The Principles of Weisbergian Political Economy

strangedoctrines — Thu, 23 Oct 2008 12:35:30 -0000

But Nicholas, housing bubbles also exist in nature. The fact that this particular housing bubble wouldn't have occurred is no more to the point than that that particular rabies epidemic wouldn't have occurred. It did occur.

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.

Re: The Principles of Weisbergian Political Economy

Nicholas Weininger — Thu, 23 Oct 2008 11:15:42 -0000

The problem with your analogy is that rabies just exists in nature. But neither the housing bubble nor the securitization bubble that magnified the housing bubble's effect were products of the free market. Both were created by bad government policies that distorted incentives: bad interest rate policy, bad tax policy, and stupidly written regulations that created an incentive for regulatory arbitrage by securitization of low-quality mortgages (read Arnold Kling on this last, he's particularly good). Yes, a bureaucrat-god could have come up with better regulation that would have prevented the mess: but part of the larger libertarian point is that the incentives and knowledge available to political actors are such that they are unlikely to do regulation that well in practice.

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*.

Re: The Principles of Weisbergian Political Economy

webgrrl — Thu, 23 Oct 2008 11:14:13 -0000

Dudes, this whole discussion has become waaaaay to divorced from reality.

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.

Re: The Principles of Weisbergian Political Economy

barrkel — Thu, 23 Oct 2008 06:37:26 -0000

Oh, don't be a moron. The incentives were all wrong, without needing the least of government encouragement. The moral hazard alone, of a system that privatizes profits and socializes losses, is enough to ruin everything.

You're still thinking "subprime". That's neither necessary nor sufficient to have gotten us to where we are now.

Re: The Principles of Weisbergian Political Economy

assman — Thu, 23 Oct 2008 05:24:58 -0000

I have a more basic objection to Jacob's argument: its completely vacuous.

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.

Re: The Principles of Weisbergian Political Economy

Don — Thu, 23 Oct 2008 02:40:48 -0000

You say:

"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.

Re: The Principles of Weisbergian Political Economy

webgrrl — Wed, 22 Oct 2008 23:35:08 -0000

Oh ScottB, Bermuda is hardly libertarian in the sense you mean. It is still a British dependency. Its people hail from Britain, Africa, the Azores, North America and the West Indies, so it's mixed race, no doubt, and also rather religious, plenty of well-attended churches.

Hong Kong, as a "special region" of Communist China, certainly couldn't be called libertarian. It is also a former British dependency.

Re: The Principles of Weisbergian Political Economy

DMonteith — Wed, 22 Oct 2008 22:32:29 -0000

Thanks, but I'm not having trouble following your argument. I just don't think that it's what Will's arguing. His rabid dog analogy is pretty far from the causal claim you make above.

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.

Re: The Principles of Weisbergian Political Economy

ScottB — Wed, 22 Oct 2008 21:01:58 -0000

So far, I have Hong Kong and Bermuda as possible examples of successful libertarianism in practice. Are there more?

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.

Re: The Principles of Weisbergian Political Economy

DMonteith — Wed, 22 Oct 2008 20:48:10 -0000

The paragraph in the original post from which I quote begins, "The most obvious objection goes to the “hack” charge." I'm not sure how I'm to construe what follows as Weisberg's POV unless you and Will are both claiming that he objects to himself because he thinks he's a hack. Two sentences later, Will goes on to posit that govt. encouragement of home ownership is "more causally fundamental than other [ideas]" as a hypothetical point of agreement between Weisberg and himself that sets the stage for Weisberg's hackish contrast to Will's virtue. Again, no room that I can see for confusing Will's actual position here, but maybe I'm just slow or Will's just writing badly.

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.

Re: The Principles of Weisbergian Political Economy

webgrrl — Wed, 22 Oct 2008 13:40:24 -0000

Depending on what you mean by "government intervention" you might be thinking of oh, Bermuda? That's a low-financial-regulation, high-liberty location with lowish taxes.

Re: The Principles of Weisbergian Political Economy

Micha Ghertner — Wed, 22 Oct 2008 13:34:32 -0000

What's interesting about this objection (which I agree with, by the way) is that it is precisely the same objection libertarians often give to the relative benefits of the Scandinavian social democratic/corporatist model over the U.S. model. For example, from P.J. O'Rourke's Eat the Rich:

A Scandinavian economist once proudly said to free-market advocate Milton Friedman, "In Scandinavia we have no poverty." And Milton Friedman replied, "That's interesting, because in America among Scandinavians, we have no poverty, either."

Moral of the story: cross-country comparisons are difficult.

Re: The Principles of Weisbergian Political Economy

strangedoctrines — Wed, 22 Oct 2008 13:24:38 -0000

Will, I agree with you that that argument is funny, though also with DMonteith that it's really not the right argument.

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).