What Friedman is saying is that too much homogeneity in a financial system leads to bad consequences when the dominant model breaks down. It’s much better to have multiple, vigorously competing models because then at least if there is a problem with one model at least it won’t lead to a systemic meltdown. Fine; this much you should be able to agree with. But Friedman also I think makes the basically Hayekian point that a regulator laying down rules which govern how a financial system deals with risk will, because their job is essentially central planning, not have the requisite knowledge to make the right judgements (see e.g. the Basel Accords and the Recourse Rule). The upshot is that, sure, “better regulation” would be nice. But the regulation that we are ever in a position to get is going to have the slight defect that it lays the entire financial system open to systemic failure. Sure, it would be nice if regulators could successfully come up with general rules that manage to limit risk. But if you think about how much of the information needed to manage risk in each particular is tacit and local, and you think about what kinds of information regulators will have, it’s pretty easy to see that the problem isn’t going to be solved by stamping our feet and demanding better regulation.

Grace: The libertarians are seductive. Comprehensive world views are. Try and keep an open mind, despite the comfort and security the paradigm will provide…

I’ve added you on FB so we don’t have to clutter up poor Paul’s blog with Susan Hurley chat.

You can be concerned about morality arbitrary inequality and not be a luck egalitarian, let’s not forget (Rawls, Jonathon Wolff, etc etc)

Grace,

I know he thinks it’s a crisis of regulation not capitalism. I was originally quoting him – if I remember – to broadly illustrtate that “crisis of regulation” was more accurate than “bankers bonuses caused the crash”.

But:
“but instead have been caused by something external – regulation. at the end of that article he basically says that since regulation artificially alters the structure of incentives – channels investment into the direction the regulators want – it has potential to be extremely dangerous and damaging, since if investment goes in the wrong direction, then losses will be concentrated and massive (as in subprime). there’s no way for a central planner to predict with the great accuracy required which directions of investment are good – so regulation = bad.”

I can just counter-point and say: without regulation you get even worse cases of cumulative-risk disaster, so that would be even worse. Central planners will certainly get things wrong, but hey, the big banking crises (1929, 2008) came in periods of lower regulation, and in the latter case came after periods in which regulation installed after the first crisis as a preventative measure was stripped away. He says: regulative structures pushed incentives towards crash, no regulation would have been better. I say: that’s unlikely, as it was insufficient regulation that resulted in the disastrous incentives, what worked in the past was more regulation.

Fair enough, I’m more inclined to say that capitalism is inherently prone to crisis unless regulated, which obviously he is against. But please, some sensitivity to my original quoting: namely, as a way of moving on from inane chatter about banker’s bonsuses. You can say I’m being dishonest or whatever, but frankly I think that’s unfair. He thinks the solution to a “crisis of regulation” is less regulation. I think the answer is better (read: more) regulation. Again, it’s a difference on prescriptive solutions, not descriptive diagnoses.

I came along to eric mack… i asked a question at the end about self-defence, were you the one doing the introducing?

ok i haven’t read any of susan hurley’s papers, so i might be jumping the gun, but is she the one who says that there is no non-circular way of specifying a luck egalitarian baseline, so ideas of luck and arbitrariness can’t provide an argument for equality? if she is then i think i agree with her. but this doesn’t leave luck egalitarianism in tatters, perhaps some moral convictions (eg equality) are so basic that we can’t explain/justify them by reference to other principles. yes there’s no non-circular way of arguing for egalitarianism, but maybe there’s no non-circular way of arguing for any principle so basic (how would you argue for the NAP? have asked ben about this with no non-circular response). we just have to accept this, and move on, with worries about using force on others, this is a big reason why i feel all warm and fuzzy inside when thinking of a world with completely open borders, a wide range of societies, people can genuinely choose which values they want to guide their society.

(and yes it is me on the news feed, very small world! :D)

so it seems to be twisting the idea behind the quote to say you agree with it, saying that it was a crisis of insufficient regulation is too close to saying it was a crisis of capitalism for the contrast in the quote to make any sense

Fair enough, perhaps it was a hasty assumption; of course, it’s an unusual combination of views to hold, and I’d be interested to know how you reconcile them. As for morally arbitrary inequality, I think anyone who uses that phrase should be forced (in a non-coercive way :) ) to read Susan Hurley’s work on luck-egalitarianism – in my view, she leaves it in tatters.

Also, proving that the world is a small place, someone purporting to be you has literally just popped up on my Facebook feed talking about the NEF (I am friends with Ben and James). If you’re at Oxford, you should definitely come along to some Oxlib stuff!

Yes, maybe abrupt. But I see most of Grace’s points as being fairly repetetive and misguided. And I’m very busy, so I reserve the right to be short…

Grace,

Yes, I did. But what I meant was that the crisis stemmed from the regulation being set up the wrong way (read: it was a) insufficient and b) poorly structured such that the incentives pointed towards a system culminating in disaster). although I appreciate that the source I quoted thinks that the answer is less regulation, I disagree on the prescriptive point. But I can agree with him that a crisis of regulation was the cause.

I don’t see anything inconsistent in my positions.

By contrast, you will observer with me, Dan, that Grace has some dilemmas coming up if she thinks her distributive egalitarianism and sense of “leftie” justice is going to continue to sit well with your-style libertarianism. (I mean that without passing any judgements on your political philosophy, and simply a prescriptive-descriptive claim about the (in)compatability of world views).

paul, you said this in october! and link to the very same article (sorry for linking it again). why do you now not take his argument seriously? what’s made you change your mind?

yes it is the same person, i’ve changed my mind on some issues but what have i said that would indicate i am no longer an egalitarian (it’s perfectly consistent to hold “right wing” views on economics, eg crisis of regulation not capitalism, and “left wing” views on justice, eg morally arbitrary inequality is unjust)

Cayne, Fuld, and the rest were perfectly aligned with shareholders. Though maybe they should have been paid in subordinated debt?

Right – how much did Fuld lose personally? Something like a billion dollars? That suggests to me that the problem is not really huge bonuses leading to principal-agent problems, even if a lot of folks on the left would really like this to be the case.

Paul,

Bizarre that you think the crisis was caused by a failure of incentives set by the government/scary-sounding central state planner. Most people tend to think the bad incentives were a product of deregulation – i.e. less involvement from government.

This seems to me to be a pretty lame response to the fairly detailed points Grace was making. I mean, I could be biased since I find her points independently plausible, but don’t you yourself often talk about how economically illiterate “most people” are? And didn’t you yourself link approvingly to Jeffrey Friedman (the source of her points) not that long ago?

Incidentally, is Grace the same Grace who used to post a while ago? I could have sworn she used to be fairly egalitarian, or at least that way inclined.