March 14, 2010
Intelligent Libertarians, Regulation and Financial Crisis: An Essay
Below is an essay – I think it’s fair to call it that – arguing that intelligent libertarians should favour regulation of the financial industry.
I’m looking for responses from sensible libertarians, liberals, and leftists of all stripes. I’m sick of abuse-hurling and tribal partisan sloganeering. Ideas are best refined when they are forced to clash.
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In this weekend’s Financial Times there was a fascinating series of articles on the collapse of Lehman Brothers following the release of the 2,200 page Valukas report into the investment bank’s failure. It transpires that Lehman was employing extremely dubious financial instruments for months before its eventual bankruptcy, in order to disguise the appalling state of its balance sheets. Using practices similar to those “pioneered” by Enron, Lehman was able to disguise its ill health from investors and creditors. Now that the truth is out, Lehman’s auditors Ernst & Young have come under intense scrutiny for waving-through Lehman’s practices, invoking the spectre of Andersen Accounting and its post-Enron demise.
The case of Lehman appears to show that if “light touch” regulation is applied to financial institutions, at least some of the lightly touched will self-destruct. It’s important to stress that Lehman wasn’t brought down by greed (though there’s little doubt that Lehman bankers, like most investment bankers, were greedy). It was brought down by the firm’s over-exposure and over-dependence on complex financial instruments that ultimately couldn’t be sustained.
There are many reactions to the story of Lehman. But I want to explore and develop just two, although I’m going to have to start by simplifying. The first is the standard response from most on the left: that Lehman should have been subjected to greater regulation. Call this the Sensible Statist position. This group claims that had Lehman been better regulated, it would not have been able to over-expose itself and become over-reliant upon financial instruments that generated short-term profit but in the long term led to implosion. By being reigned reined-in during the short term, the bank would have survived into the long term.
The other response I want to examine is what I will call the “Intelligent Libertarian” view. Again I am simplifying. The Intelligent Libertarian argues that if Lehman over-exposed itself, then tough luck for Lehman. It was not only right that it was eventually allowed to fail – it was right that it was allowed to get itself into a position where it could fail. Intelligent Libertarians believe that capitalism is a game you play at your own risk. Accordingly, financial markets should be totally de-regulated. Those firms that, like Lehman, over-expose themselves will fail. That’s the harsh reality of capitalism. But it’s not all bad: those firms that survive will be those that don’t over-expose themselves, the ones that make the right moves and the right gambles. The best will survive – and the rest, wanting to compete with the best, will emulate the activities and practices that have proven successful.
Yet straight away we must complicate the picture. Lehman’s failure was not an isolated case of one investment bank over-exposing itself and failing, indicating that it was a worse-run business than its competitors and thus deserved to die by the sword of capitalist competition. Those sorts of bank failures happen all the time – but Lehman was different. Lehman’s collapse was part of a systemic failure in the banking system. All the world’s financial institutions were circling the plug hole. Lehman was allowed to go, but when the US Fed (and the UK Treasury, and the ECB) realised that all the rest of the world’s investment banks, insurance providers, hedge funds, building societies and brokers were going to go too, action was taken. Following the lead of Hank Paulson and George W. Bush, trillion dollar bailouts were announced. The world’s banks became socialised, and capitalism was turned on its head.
What do our Sensible Statists and Intelligent Libertarians have to say about this? There are two areas we need to consider: whether the bailouts were justified, and whether the crisis would have been averted if the world of finance had been subjected to more thorough-going regulation. The argument I am going to make, however, is that the two issues are intimately connected, and as a consequence Intelligent Libertarians should end up backing greater and better regulation of the financial industry. I’ll start off by examining only the arguments about whether the 2008 bailouts were themselves justified.
Sensible Statists have always offered a resounding “yes” to this question. The argument they put forward is clear and compelling: that a collapse in the global banking system would have caused unimaginable, unprecedented chaos. If the banks had failed, then all bets would have been off. Not only would cash have ceased to come out of ATMs, the very wheels of capitalism would have stopped turning. Panic would have swept the developed world, riots would have begun, governments would have collapsed, and an entirely new era of human civilization – or lack of it – would have ensued. This, Sensible Statists say, was not a price worth paying. Trillion-dollar bailouts with taxpayer money, plunging Western governments into unimaginable debts, were the cost that had (and have) to be endured.
Intelligent Libertarians disagree. They argued – and have argued consistently – that the price of the bailout was too high; not just in terms of taxpayer dollars, but in terms of the perversion of the very essence of the capitalism which has made the west rich and free. Intelligent Libertarians do not deny that a banking collapse would have been painful – indeed, horribly so. But they argue that growing out of this pain a new order of capitalism would have emerged. Drawing upon the ideas of seminal 20th Century philosopher and economist Joseph Schumpeter in particular, Intelligent Libertarians might argue that if the banks had failed, this would have led to the much-needed process of “creative destruction”. The old order would have fallen – but a new and better one would have risen in its place, one that learned the mistakes of the past and built on them to improve. Instead – the Intelligent Libertarian points out – what happened was that western states merged with the banks. A nightmare vision thus arose. The already out-of-control behemoth corporate institutions that strangle competition and free enterprise (what genuine free market capitalism depends upon in order to be a force for good) were married with the power of modern states. Diabolical hybrids were born: financial institutions that are not only too big too fail and can thus commit economic sins with impunity, but which are propped-up by the tax-dollars of ordinary people, and maintained by the coercive power of the state. For the Intelligent Libertarians, the 2008 bailouts heralded a nightmare vision of capitalism twisted beyond recognition into something hideous.
There is much to be said for the Intelligent Libertarians’ concern at the mutant offspring of states and megacorps that has emerged from the world financial crisis. Witness the spectre of RBS. Operating like a private investment bank, RBS pays its executives billions in bonuses, funds the extracting of Canadian tar sands oil (which climate scientists describe as one of the biggest single factors likely to facilitate run-away climate change) and refuses to lend to struggling businesses. All the while it has a taxpayer guarantee that it cannot fail should it make poor market decisions, and its debts are backed by the coercive power of the British State. Intelligent Libertarians are right to sound the alarm bells at the rise of such entities.
Yet what has happened as a result of the bailouts is a different issue from whether the bailouts should have happened. As outlined above, Intelligent Libertarians do not think that the immense pain of a global capitalist collapse should have been suffered for the fun of it. Rather, they see it as the necessary though unpleasant price to pay for an improved world order. But are they right?
The Intelligent Libertarian world-view looks, quite simply, untenable. We already have examples of what happens when capitalism fails – and they’re not pretty. The obvious case study is, of course, Weimar Germany. When hyperinflation, extended depression and mass unemployment took hold, ordinary Germans did not call for more capitalism. They looked for solutions in Hitler’s National Socialists, who promised authoritarian routes out of crisis that bred not only the horrors of global war and the Holocaust, but precisely the sought of state-corporate gangster capitalism that Intelligent Libertarians abhor. (It may be worth reminding Intelligent Libertarians that their bete noir John Maynard Keynes developed his theories in order to save capitalism from the twin threats of fascism and communism at a time when liberal capitalist democracy looked like it was about to kick the bucket).
But we need not rely solely on such dramatic and emotive examples. Think of Britain in the 1970s and 80s. In the midst of dire economic straits, many Britons did not call for more free market liberalisation. Thatcher’s reforms were unpopular and pushed through only because Labour dove so far into the hard left that it could mount no meaningful opposition, whilst the power of the state was employed to crush organised labour. During the 1970s and 80s, the National Front thrived – by offering extremist solutions to an extreme situation (making Nick Griffin’s present BNP look positively wet). Indeed, look at Britain today: when the economy struggles and jobs are scarce, ordinary people do not call for more free market capitalism. They call for protectionist policies to defend home industry (think Cadbury) and for draconian impositions on migrant labour (think Daily Mail).
Intelligent Libertarians may want to argue that such responses in ordinary people are wrongheaded and ultimately self-destructive. Perhaps they are right. But this reply misses the point. In times of large-scale capitalist crisis, political movements develop that are deeply antithetical to the free market capitalism that Intelligent Libertarians espouse. Even if Intelligent Libertarians are right that if left to itself the market would recover from a global capitalist crash to produce a better form of capitalism, the problem is that the market will never be left to itself in such circumstances. Following a global crash of the sort envisaged had the 2008 bailouts been denied, extremist groups seizing control of nation-states on the promise of never allowing capitalism to rise again would have been far more likely than a short spell of pain followed by rational economic actors diligently picking up the pieces. The alternative universe in which the bailouts were denied has tanks on the streets, with people and nations falling back into state communism and fascism. If the bail-outs had not happened, state-minimalist capitalism would have been the last thing to emerge.
Thus the Intelligent Libertarian claim that the bailouts should have been denied, and the pain endured, looks misguided. I now, however, want to take a brief detour and examine some of the intellectual history around questions of state intervention in times of extreme emergency.
Many Intelligent Libertarians will look to Adam Smith as an important intellectual forbearer. And in many cases, they are justified in doing so. In particular, Smith’s Wealth of Nations addressed – amongst many other things – a central question in the history of the development of property rights: whether the law concerning property rights ceases to apply to desperate individuals in times of extreme necessity. Previous thinkers like Hobbes hard argued that the law does so cease: if a person is starving and the only way they can survive is to steal a loaf of bread, then they are automatically excused from breaking the law. In such a case – Hobbes thought – the law could have no purchase; it ceased to have meaning and excuse was automatically conferred on the law-breaker. Law’s function, in Hobbes’ schema, was to protect all of our rights to survive; if the law stood between an individual and the loaf of bread they needed to carry on living, then the law ceased to have meaningful content. Violation of the property rights of the bread-holder were thus automatically justified, and the violator was automatically excused (though the law against bread-stealing would itself stay in place due to its general tendency to promote the wellbeing of all, considered collectively and systemically).
Smith disagreed. For him, property rights had to be enforced as foundational to the jurisprudential structure of society, and they had to apply in all cases. If a starving man stole a loaf of bread to survive, then he broke the law. Now, if apprehended and taken to court for such law-breaking, a judge might consider the circumstances and offer clemency to the bread thief whilst still finding him guilty. The point, however, is that the law continued to apply – but in this case, punishment might be forestalled on the grounds of extenuating circumstance (the bread thief, after all, was starving). Whereas for Hobbes the law against stealing bread ceased to have meaningful content because the bread-thief was starving, for Smith the law continued to apply (a violation of the bread-owners legal property rights had certainly occurred) but punishment for this violation might be mitigated by a sympathetic judge. Though equally it might not. (However, given what Smith says in his Theory of Moral Sentiments, it seems that he would personally have hoped that judges be sympathetic in such cases).
As a result, Smith made property rights foundational. They became, indeed, the central supporting pillar of his vision of (broadly) free-market commercial society. And it’s Smith’s vision that we have embraced. Steal a loaf of bread today and – even if you are starving – the authorities will still charge you with theft. If you are lucky, the magistrate will let you off with a slap on the wrist when you go to court – but then, she may not. Thus, the centrality of continuing absolute property rights – as envisaged by Smith and his natural law forbearers like Grotius, Pufendorf and Locke – goes to the heart of modern capitalist society. And insofar as Intelligent Libertarians uphold the inviolability of property rights, they are indeed following Adam Smith.
Yet perhaps many Intelligent Libertarians would be interested to know that Smith did not consider the same rules to apply from the perspective of the state. Whilst individuals were always bound by the rules of property, as enshrined in law, the state was sui generis. Here Smith followed his friend and intellectual interlocutor, the great philosopher and economist David Hume. Hume had argued that, in times of extreme national emergency, the government must do whatever was required to save the nation. Under ordinary circumstances it would of course be wrong for the government to burn the suburbs of the capital city – but if that was the only way to prevent the enemy’s approach then it must be done.
As Istvan Hont, the world’s most pre-eminent authority on the foundations of modern political economy has remarked:
“Hume had taken it for granted that magistrates had the right to open private granaries and distribute grain to the poor at set prices, not merely in a situation of actual starvation, but ‘even in less urgent necessities’. He had used this example to argue that ‘the rules of equity or justice depend entirely on the particular state and condition in which men are placed’. In situations of ‘extreme necessity’ it was ‘perfectly useless’ to insist on maintaining an unlimited right of private property. Smith followed this line, but seems to have closed off the case of ‘less urgent’ necessities. Only actual impending starvation appears to qualify as the ‘case of most urgent necessity’ which would justify the suspension of property rights in grain.”
Istvan Hont, “Needs and Justice in Adam Smith’s Wealth of Nations”, in Jealousy of Trade, (Harvard, 2005).
(Grain was a favoured 18th Century example, because fluctuations in the grain price and in extreme cases the lack of grain itself could cause riots amongst the common people that had the potential to topple governments).
The point is that for Smith, from the perspective of the state, extreme necessity justifies suspension of the law regarding property rights. If the only way to hold a nation together was for the state to violate the property rights of individual grain holders then so be it. Salus populi suprema lex est – the safety of the people is the supreme law.
It is interesting therefore to note that when George W. Bush announced the 2008 bailout, he invoked the safety of the American Republic as his justification. The threat to national security was deemed so extreme that the normal rules of capitalism were suspended: salus populi suprema lex. Bush was, therefore, acting within the Smithian tradition. So it is worth Intelligent Libertarians reflecting upon their own intellectual heritage. Whilst the 2008 bailouts might jar with their ordinary preferences for state minimalism, it is not inconsistent – or necessarily unprincipled – for them to agree that desperate times call for desperate measures. Smith would, I think, have supported the 2008 bailouts, albeit grudgingly.
So Intelligent Libertarians need not – by virtue of their ideological principles – be committed to opposing concerted state intervention in times of extreme emergency. And given the likely consequences of not undertaking such a bailout in 2008 – namely, the collapse of global capitalism and the rise of something much nastier in its place – Intelligent Libertarians should think hard about that, in terms of their own long-term ideals and goals.
It is now time to return to the issue I earlier put aside: the question of general regulation of the financial system. I promised that this would connect up to the question of the 2008 bail-out, so let me now draw that connection.
Whilst some Intelligent Libertarians – such as Jeffrey Friedman – have argued that the crisis which broke in 2008 was a crisis caused by the wrong sort of government regulation (even if it was extremely minimal) and would have been averted had there been even less regulation, what the 2008 crash ultimately seems to have shown is that systems fail. And they can fail spectacularly. In her book Fools’ Gold, FT editor Gillian Tett demonstrates that the crisis was certainly not caused by greedy bankers deliberately bringing down the global financial system whilst stroking white cats and chortling evilly. Rather, the crisis arose because many interdependent actors all pursued actions which were individually rational, but when summed-together added up to catastrophe. Yet a key problem that Tett identifies is that not only were the new financial instruments developed by the world’s biggest banks unregulated – they were barely understood by the people using them. Furthermore, the bosses and senior managers of the people inventing and manipulating new financial instruments were largely ignorant about what their subordinates were doing (and in most cases frankly uninterested in, so long as the cash kept rolling in). Accordingly, the world financial system kept on accelerating towards lightspeed – until one day it fell off a cliff.
Now, even if someone like Friedman is right that the 2008 crash was caused (in part) by the wrong sort of regulation, one thing that doesn’t seem to follow is that crashes would be averted if there was no government regulation. What Tett ably brings out is the fact that systems can fail – and the more complicated and fast-moving those systems are, the more spectacular and devastating those failures can be. There are some libertarians – let’s call them the Unreflective Libertarians – who will claim that a financial system devoid of any government regulation will never fail, and that only government attempts at regulation cause crisis.
Yet this sort of Unreflective Libertarianism is untenable. This is because it’s a piece of sheer dogma. The idea that the market can never fail because it is the market, and that financial crashes are only caused by government meddling, is crass ideological rhetoric motivated not be consideration of the facts or of history, but by blanket hatred of government. It’s simply ludicrous to claim – as the Unreflective Libertarian must – that the law of unintended consequences can be avoided by simply removing one actor (i.e. the state). As Tett demonstrates, the 2008 financial crisis arose because of interconnected actions which, whilst individually harmless, were collectively disastrous. To say that free markets are not vulnerable to such phenomena simply because they are free markets, is to employ the most mentally-crippling of ideological frameworks.
However, coming at things from the other angle, there does seem to be a case for some government regulation of financial markets – and certainly more than was in operation prior to 2008. It is surely not insignificant that the Wall Street Crash occurred during a period of relatively low financial regulation. Nor that following the Reagan-Thatcher era of financial deregulation we have witnessed major financial crises in South East Asia, Russia, and Latin America, the bursting of the dot-com bubble, and the great crash of 2008. Indeed, concerning the latter Tett is again instructive: if senior managers and regulators had even possessed the barest clue about what derivatives traders were actually up to – and had imposed measures to slow down the pace of financial innovation – then it’s possible that investment banks and insurance companies like AIG would not have been able to build up the “super senior” debt that went toxic over 2007-8 when credit lines ran dry, eventually bringing the global system to its knees.
Which is not to say that government regulation universally prevents financial crises. That would be wrong, and also to commit the sin for which I criticise the Unreflective Libertarians. Yet it does seem to be the case that whilst government regulation cannot eliminate financial crises, it can certainly mitigate their frequency and devastation if done sensibly. In turn, that makes the need for 2008-style mass bailouts less likely.
Which brings us full circle. Although I hope to have shown that there are good grounds for why Intelligent Libertarians ought to be able to endorse drastic state intervention in times of extreme necessity, no Intelligent Libertarian would want to make a habit of it. Indeed, neither would any Sensible Statist. We’ll be picking up the pieces from the 2008 bailout for decades to come, even if we only start to feel it after the next government begins the deficit-slashing.
A 2008-style bailout has to be – for Intelligent Libertarians – something which can be resorted to only in times of extreme desperation. Accordingly, it is surely better if we collectively undertake measures to prevent the need arising for such extreme measures. How do we do that? We regulate financial markets.
Thus it appears that if Intelligent Libertarians are to avoid having to resort to the sorts of mass government intervention that they despise – or likewise avoid advocating the collapse of global capitalism on the fantasy-land justification that a new Capitalist Utopia will inevitably arise in its place – they would do well to endorse regulation of the financial industry. Of course, Intelligent Libertarians won’t like this. But then, in politics and life we all often have to do things we don’t like. And in case Sensible Statists are feeling smug, they should recall that deregulated financial capitalism brought an unprecedented 15 years of sustained economic growth to Britain, vastly improving the lives of millions. Increased regulation would mean less super-growth capitalism, and that would have negative impacts upon all our lives too (though we might think that’s the price to pay for avoiding extended economic depressions caused by financial crashes).
So it seems that there are good grounds for thinking that Intelligent Libertarians ought to support some regulation of the financial industry (exactly how much is a question for extended debate – yet given the above I suspect the answer is “more than what Reagan and Thatcher left us with”). And if hyper-capitalist Libertarians must accept this, then it seems that anybody thinking sensibly about the issues at play will have to agree (you can’t really get more pro-free market than a Libertarian, after all). So when Giles Wilkes – chief economist of the liberal think tank Centre:Forum – criticised Intelligent Libertarian Johan Norberg’s book Financial Fiasco and urged him “to recognise that government, very occasionally, offers the best way to protect the economic liberty so precious to the author”, I would go further than Wilkes. It is not just “very occasional” government intervention that Intelligent Libertarians should reconcile themselves to, but – and on their own ideological grounds – sustained and well-considered routine regulation of financial markets.
There is, however, the lingering problem touched upon earlier: the mutant offspring sired by state-power and gigantic corporate failure. The 2008 bailouts happened, and those entities now exist. This is a problem. Whilst it might seem straightforward – at least, post 2008 – to criticise hardline free marketers for their views, Intelligent Libertarians are nonetheless absolutely correct to ring alarm bells about the new monsters of socialised corporatism that the bailouts have awakened. These new entities take us into virgin territory in the development of economics and political economy. The deep suspicion and hostility espoused by Intelligent Libertarians towards these behemoths of socialised corporatism are feelings that we ought all to share – whatever else we might disagree about.
Tim Worstall said,
March 15, 2010 at 8:18 am
Get the snarks out of the way first.
You rein in behaviour, not reign it in. We’re talking about bolting horses here, not Monarchs.
“and as a consequence Intelligent Libertarians should end up backing greater and better regulation of the financial industry.”
Better follows: but greater does not. Different regulation perhaps.
And about Lehman…I would be very careful about equating their behaviour with Enron. For (from what I understand) they were doing precisely the opposite. Enron hid debt off balance sheet. Lehman was hiding assets off balance sheet. Enron didn’t want people to know how much they owed. Lehman was trying to hide how much they owned….for that would reduce their leverage ratio and thus make them look safer. Less being piled on top of a thin layer of capital.
But on to regulation and the meat of the argument. I see what happened as only partially a crisis of then financial system.
What really happened (and this is drawn from Dean Baker, so clearly I’m willing to take ideas from across the ideological spectrum) is that there was an $8 trillion housing boom in the US. That popped. Any financial system is going to feel the strain of the evaporation of $8 trillion in wealth. Especially a financial system that is financing it.
Whether the banks were trading CDOs and CDSs or whether the boom had been financed by mutals like Savings and Loans, there would still have been a huge financial crunch. In the UK, much the same. Northern Rock, for example, went down from having provided mortgages. Not as a result of any fancy trading. And no, their securitisations through Granite really didn’t make any difference.
The second major point is that we’ve known for centuries that financial systems without deposit insurance are liable to runs. We had deposit insurance (FDIC in the US, a more limited version in the UK) for individual depositors. But not for corporate nor for wholesale markets.
One of the major developments over recent decades was the way in which much of the banking system was financing itself from those wholesale markets. Without any deposit insurance. So when the financial crunch came (and if it hadn’t been housing it would have been something at some time) the short term credit markets seized up. What we had was quite simply a bank run on almost all of the banks at the same time. If you’re financing from the wholesale markets and they refuse to roll over overnight or 7 day lending then this is indeed a bank run. Remember again that Northern Rock didn’t go down because it could not finance its securitisations, Granite. It went down because its business model relied on the wholesale markets to finance mortgages in the short term while they piled up to be securitised. When the wholesale markets shunned them it was their short term holdings on their own books that could not be financed, not those bonds they had sold on.
Now those two major points don’t mean that there weren’t other problems. AIG writing CDSs off their AAA credit rating for example (a particularly silly decision). Lehman fiddling the books.
But those two major points are what “really” caused the crisis. Not bankers’ bonuses, not speculative trading, not the foreign exchange markets, not futures or options, not metals trading, commodities, not CDSs themselves nor securitisation of loans. We really did have two root causes:
1) Boom that busts to the tune of a minimum $8 trillion.
2) A banking system without deposit insurance.
So, if this analysis is correct (and I would insist that it is in at least a broad brush manner) we can now see where we should be directing our attention in order to have the better regulation that we desire. Not better, not necessarily more.
BTW, as an aside, I may indeed be a nut case classical liberal but the difference between one of those and a libertarian quite possibly resides in the admission that yes, banking really is different.
The first is the most obvious. How do we stop a boom in housing from happening again? While there will certainly be booms and busts in other areas of the economy (there really always will be while we have anything remotely like a capitalist system) housing is especially problematic precisely because home owners get so geared up and the banking system is providing that gearing. It’s a very rare stock trading account that will lend you 80%, 90%, of your position.
Those places in the US which had huge booms (and thus busts) were those with heavy restrictions upon what could be built where. This is also of course the thing which plagues the UK market. (Eire and Spain are different in this regard. Their problem was caused by Euro membership and interest rates being set for Germany.) Houses are, just as they always have been, worth somewhere around their replacement cost. What changes in value is the right to build upon a piece of land. The value of planning permission.
Unless we change that system we’ll simply see another boom sometime down the road. when crappy agricultural land is £4,000 an acre and the same land with planning granted is £500,000….that’s the basic problem.
As to deposit insurance. Well, the best suggestion I’ve seen so far is the Obama proposal to charge large banks (and I could happily imagine this being extended downwards, perhaps being a charge on the use of wholesale funding to mirror current deposit insurance charges) on their liabilities. Whether they’ve the right rate is another matter. But if the basic analysis is correct, that banking systems without deposit insurance are subject to runs, we’ve just had a run on the financial system which didn’t have deposit insurance then perhaps the solution is to have deposit insurance on those using the wholesale markets.
So my solution would be a mixture of less regulation (near complete deregulation of the land market) plus more regulation (deposit insurance) leading to better regulation.
I do regard all the moaning about bonuses, Robin Hood Taxes, the evils of speculation and so on as people proving the reality (as opposed to the way she describes it) of Naomi Klein’s Shock Doctrine. We have these bugbears buzzing in our brains, here’s a crisis, let’s use it to attack what we don’t like.
Who cares whether we actually solve the problems that caused the crisis: we’ll still get rid of what we don’t like.
That’s probably enough for one comment.
Luis Enrique said,
March 15, 2010 at 10:36 am
Paul,
There are some people who I’d consider both intelligent and libertarian who agree with you on this. Tyler Cowen is one of the highest profile of these – here he is making an argument that echoes yours (at least, the bailout bit). Note that he says another famous libertarian Milton Friedman would also have endorse bailouts. (More on that subject here)
I can’t say that I understand what is (or isn’t) the libertarian position on the existence of dysfunctional free markets (do they deny they exist, or perhaps think that attempts to cure will always be worse than the disease?)
My feeling is that there are a number possible regulatory reforms of the financial system that would keep the good bits and remove bad bits, and that in principle sensible libertarians ought to endorse reforms that help free markets to function better, which is what I think you are arguing too.
Luis Enrique said,
March 15, 2010 at 3:52 pm
Some more potentially relevant stuff: This post talks about how “conservatives who get it” support financial reform. And the conference the author recently participated in, Make Markets be Markets (link can be found by following prior link) fits nicely with your arguments here – the smarter defenders of free markets believe that job requires taking on vested interests, like big finance: http://www.savingcapitalism.com/
(another book Tim W should read). One of the authors of that book has since made his name, in retrospect, with a 2005 speech warning that the global financial system was in danger.
Paul Sagar said,
March 15, 2010 at 11:51 pm
Urgh, just got back from hearing Amartya Sen, have done a quick blog for tomorrow and now need to sleep because I’m out of it.
Then going to a conference all day.
Will reply late tomorrow – sorry!
Jimmy Hill said,
March 16, 2010 at 12:33 pm
Great post, I really enjoyed reading it.
Adherents to any ideology, and particularly libertarians, need to realise that the world is one of second best solutions, and frequently third and fourth best solutions. It is not enough to suggest the solution to any policy problem is to deregulate and get the meddling government out of there. This isn’t to say that less government isn’t a positive aim, but that there are certain institutional givens that can’t (easily) be uprooted and disposed of. For one thing the sudden movement from one set of institutions to another is likely to cause havoc. It seems that the Intelligent Libertarian Ludwig von Mises understood this with regard to his actual policy advice.
I realise that many people of all ideological stripes may be a bit wary of working only within the status quo, after all if there were no idealists pushing for things that seemed unthinkable at the time women wouldn’t have the vote and slavery wouldn’t have been abolished etc. However, what this really shows is that it’s possible, and even desirable, to hold more than one intellectual position (this is covered quite well in the above link in reference to ‘policy horizons’) without being a ‘sell-out’.
On to your substantive points, even Nozick accepts that in the event of some moral catastrophe then the violation of property rights is acceptable. If your suggestion of what would have happened if the banking sector collapsed is accurate this could quite easily count as a moral catastrophe.
As for the Unreflective Libertarians that you refer to who might claim that crashes would be averted if there was no regulation, I’m not sure that their position is quite as ludicrous as you suggest. This is because what these type of people actually argue for is not really a market with no regulation, but a market with just a few very strict regulations. These regulations would include a currency backed by gold, 100% reserve banking, and the abolition of central banks (this isn’t really a regulation I suppose). They would say that within such an institutional set up actors pursuing their own interests couldn’t create a bubble as huge as the housing bubble. Of course there are some very good arguments as to why 100% reserve banking may not be a fantastic idea…
You suggest that greater/better regulation is the answer to the banking woes that we have had. However, is it actually possible for regulators to stay one step ahead of the bankers? I’m sure if regulators had known exactly what was going on in the banks they may have been able to do something about it, but the solution can’t just be regulators should do what they do better. There are plenty of reasons why regulators may not be able to ‘beat the bankers’. One is the knowledge asymmetry between bankers and regulators; the bankers are much more likely to know where the bodies are hidden. Also, those individuals bright enough to get a handle on all the tricks and dodgy manoeuvres being pulled by bankers might not be attracted to being a regulator as the pay isn’t great compared to what that bright individual could earn working for a bank. Finally there are the massive problems of regulatory capture and the revolving door.
Given that regulation can fail and even have perverse consequences, perhaps the best solution is to break up the banks? We can then do away with the notion of a bank being too big to fail so that next time something like this happens banks can be allowed to fail without potentially plunging civilization into darkness. Arnold Kling makes this argument.
Jimmy Hill said,
March 16, 2010 at 12:35 pm
Sorry, this is the Arnold Kling post.
Nation Scared of a block of Text « Freethinking Economist said,
March 16, 2010 at 4:03 pm
[...] nation (hat-tip ChartPorn): scared of uninterrupted text. Which is why I have not done justice to Paul’s erudite and challenging essay about what ‘intelligent libertarians’ should demand of financial regulation. But I [...]
Richard W said,
March 16, 2010 at 7:41 pm
Most of the unthinking just let them go bust narrative is because people do not appreciate that banks are different. The whole banking system relies on confidence and when confidence is lost the bank who opened their door solvent in the morning can be insolvent by the afternoon. No other types of businesses can go from being solvent to insolvent so quickly. Moreover, no other types of businesses can cause devastation for others to the same degree as a bust bank, hence the fundamental need for effective regulation.
Consider RBS where 25% of UK salaries go through a part of the group: 33% of all UK electronic payments daily go through the group. If they had been allowed to go bankrupt tens of thousands of unconnected solvent firms would have gone down with them. Moreover, if Tesco go bankrupt their competitors are strengthened. If a large bank goes down they are most likely to take the other banks down with them through the loss of confidence.
One of the reasons why the UK banks were so badly affected 2008 was the structure of the assets on their balance sheets. This was a failure on the part of the regulators but a failure that was due not to incompetence but unintended consequences. The UK pension funds and insurance companies had been pressing the Debt Management Office to issue long-dated gilts so they could match their liabilities. As a consequence, the UK banks were starved of short-dated liquid debt securities. Therefore, they were forced to fill their balance sheets with mortgage backed securities that they erroneously believed would be as liquid as government debt securities. When the meltdown started in US sub-prime they were left with illiquid assets that no one would accept as collateral. Moreover, the BoE stopped acting as a central bank and initially also refused to accept them as collateral. This caused paralysis between the UK banks. The BoE have escaped criticism for the financial crisis but they caused the near collapse of the UK banking system not the banks themselves.
It is ironic that the long maturity of UK government debt is on one hand good debt management, which saves us from a sovereign debt crisis. However, it was the scarcity of short-term government debt securities that at least exacerbated the banking crisis. The one regulation that will go some way to prevent a future banking crisis is to compel the banks to hold more liquid short-term government debt securities. However, that means the government must issue more and that leaves the government vulnerable to roll-over risks.
Tim Congdon wrote a good if rather long paper highlighting the same issues.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1421288
Peter said,
March 16, 2010 at 9:25 pm
Jimmy Hill,
“On to your substantive points, even Nozick accepts that in the event of some moral catastrophe then the violation of property rights is acceptable. If your suggestion of what would have happened if the banking sector collapsed is accurate this could quite easily count as a moral catastrophe.”
- This sounds interesting. Where does Nozick say it?
Paul Sagar said,
March 16, 2010 at 10:40 pm
Urgh, just got back from a conference. Knackered. Need sleep. Will reply to everyone ASAP (promise!)
leftoutside said,
March 16, 2010 at 11:59 pm
@Paul
Oi, you found time to comment on my blog!
I’ve been avoiding reading this for reasons similar to Giles’ above but I promise I will read it and comment because it looks interesting. Ah! Midnight, I’ve got work tomorrow.
Straus said,
March 17, 2010 at 1:36 am
A more recent example of the insidious effects of weak regulation and ensuing economic collapse is Russia, where the discrediting of market economics also led to the entrenchment of state-backed gangster capitalism accompanied by repressive government and an aggressive foreign policy. However, like Weimar Germany, Russia was a country with fragile and untested democratic institutions, which were easily discredited. I think it is unduly pessimistic to suppose that even a very acute financial crisis in the UK would led to tanks on the streets and all the rest of it. Even a relatively unstable country like Argentina appears to have emerged from its recent financial turmoil more or less unscathed.
It seems to me that one problem with the bail-out is that it has allowed what might be a fundamentally flawed system to endure without serious reform. And I don’t just mean the financial system. Might not one result of the crisis taking its course have been to significantly reduce the influence and attractiveness of the City and to allow other parts of the economy to prosper, if only because more bright people would be drawn to them.
Excellent post – a pleasure to read!
Jock said,
March 17, 2010 at 4:30 am
I’ve written an equally long but less erudite I should think response on my blog. Not sure why it has not shown up here as a ping-back entry though.
teek said,
March 17, 2010 at 8:55 am
I feel that, as a non-specialist wading in to comment on a thread populated by such great economic thinkers, I may get shot down big time, but nonetheless here goes:
Agree entirely that to avoid the massive state intervention seen in the bailout, effective regulation is the answer – and Intelligent Libertarians simply have to accept this. I’d go a little further in my criticisms of Sensible Statists though. The question is not whether bailouts are required – as you said, and as Smith believed, salus populi and all that. The question is what form the bailout takes. It is not sufficient to bail out the institutions that caused the systemic crises, socialising risk and allowing the banks etc to privatise profit – and bonus payments from publicly owned banks are abhorrent for this reason – the bailout should have been better structured. Sitting back and saying ‘we saved the world’ is intellectually vacuous when the bailout was effectively a blank cheque to continue many of the practices that caused the crash in the first place. IMHO ‘the spectre of RBS’ doesn’t signify that bailouts are wrong, just that this bailout was wrongly executed.
So yes, some effective regulation would probably obviate the need for drastic emergency intervention – as a biomedical scientist I’m familiar with the maxim ‘prevention is better than cure,’ and so are economists.
Where I’d take slight exception is your contention that
. That GDP grew at unprecedented rates and for an unprecedented continuous time period is not denied – it’s just that because finance went unregulated, the benefits of that growth accrued to the upper echelons of society whilst those with more modest means had their lot undoubtedly improved, but only because of the ‘trickle-down’ drip-drip of apologetically redistributive welfarist policies of Nu Labour… But then the fact that with an under-regulated market, not only is systemic instability higher but more people are excluded from owning the fruits of their labour (profits increase faster than wages, am I right…?), leading to greater inequality of wealth, is perhaps another story… :-)
cracking post btw.
Explaining the financial crisis said,
March 17, 2010 at 10:07 am
[...] rather said this over here. Originally written for a conference of the Federal Reserve, Gary Gorton’s “The Panic [...]
The EC report on the UK deficit: the illogical heart of the EU « Though Cowards Flinch said,
March 17, 2010 at 10:29 am
[...] Everything is changed because the deficit is caused by the 2008 meltdown (see Tim Worstall’s interesting comment at Paul S’s place on the ‘real’ reasons for this), and governments’ need [...]
Liberal Conspiracy » The illogical heart of the European Union said,
March 17, 2010 at 2:01 pm
[...] not the case. Everything is changed because the deficit is caused by the 2008 meltdown (see Tim Worstall’s interesting comment at Paul S’s place on the ‘real’ reasons for this), and governments’ need to bail out [...]
Richard said,
March 17, 2010 at 2:31 pm
“The idea that the market can never fail because it is the market, and that financial crashes are only caused by government meddling, is crass ideological rhetoric motivated not be consideration of the facts or of history, but by blanket hatred of government.”
Well, libertarians who are fans of the Austrian School would disagree. They would hold that artificially low interest rates lead to a distorted capital structure (in this case excessive investment in the US housing market). Why are those interest rates excessively low? Because either (a) a government institution (the Central Bank) is holding them too low or (b) credit creation due to fractional reserve banking (which the Austrians hold wouldn’t occur in a genuinely free market, although this is debateable). Personally I have a lot of sympathy for the Austrian theory and their policy suggestions (referred to by Jimmy Hill above) especially as they have been predicting a bust for quite a while more mainstream free-marketeers (let’s call them neoliberals) were expecting the boom to go on and on and on, a bit like rving Fisher in the 1920s. Come to think of it Ludwig von Mises, prominent Austrian economist, predicted the 1929 crash too.
Jock said,
March 17, 2010 at 2:42 pm
Indeed Richard, I go into a lot of that in the response on my blog I mentioned above.
In our case there is specific evidence from Eddie George himself, that the start of the current boom, and therefore in Austrian cycle terms, the direct progenitor of this bust was a political decision in the UK to hold interest rates artificially low after dot.com went belly up to try to avoid dipping into recession just before Labour’s first attempt to get re-elected.
This has been a double disaster for many people in the UK of course, because the only place that extra money could really go was into land speculation, driving housing out of the reach of millions in the process. So this government shafted millions on the way up and are shafting even more on the way down, all for a short term electoral advantage nine years ago.
Now, does anyone seriously think government should be involved in regulating financial markets? They *are* more often than not, the cause of the problems markets get into a twist trying to react to.
Jimmy Hill said,
March 17, 2010 at 2:48 pm
Hi Peter,
Going back to the text I think I have overstated Nozick’s position.
In a footnote on p.30 of ASU he writes: “The question of whether these side constraints are absolute, or whether they may be violated to avoid catastrophic moral horror, and if the latter, what the remaining structure may look like, is one I hope largely to avoid.”
I’d say that it’s possible he would accept such a violation but just doesn’t want to actually say it. This was the interpretation that Barbara Fried presented at a conference I attended.
Jock said,
March 17, 2010 at 3:50 pm
My feeling would be that in a non-state society where title and dispute resolution was handled through a web of insurance, arbitration and protection firms, in such extremes as are touched on in this essay there are actually many ways, short of aggressive violation of property rights, in which someone with the “only essential supply of xxx” would be socially pressured if necessary to make it available, compensated by philanthropic others (even better I guess) or even, in extremis, a title claim laid before an arbitrator who would find it difficult to justify allowing one person to starve a whole population, say.
In any event, I suspect it would be more consensually managed than a decision made by some satrap in a government bureaucracy somewhere to send the army in to relieve said hoarder of their property forcibly.
Paul Sagar said,
March 18, 2010 at 12:23 am
OK, finally got some time. Typical that I put up a massive piece and then end up being tied-up for 2 days and unable to make responses. However, thanks to everyone who’s replied, and also thanks for the way everyone has engaged in a civil and respectful way. Right, I’ll try and deal with what’s directed at me…
Tim,
Re Enron: yes, I take the point. I only meant the comparison as quite a general one, and because a lot of commentators are drawing attention to the trouble that E&Y might now be in, and how that might be similar to Andersen, etc.
“Northern Rock, for example, went down from having provided mortgages” – 125% mortgages, let’s not forget. Yes, Rock over-exposed themselves. But they were also playing the derivatives game (from what I understand). There is, therefore, a question about responsible lending practices and whether building societies should have been allowed to play in the same pen as the investment banks. Which, surely, becomes a question about regulation?
“But those two major points are what “really” caused the crisis. Not bankers’ bonuses, not speculative trading, not the foreign exchange markets, not futures or options, not metals trading, commodities, not CDSs themselves nor securitisation of loans.”
I think I partly agree with this – but the collapse had an awful lot to do (or so says Tett) with the use of CDSs, or more precisely, CDOs of ABS. That pretty much everyone except JPMorganChase piled up way too many CDOs of ABS, and hence when the mortgage market went downhill, so much debt in the banks turned toxic. So I’m resistant to your claim (or implication) that securitisation wasn’t central to the crisis (but again, I’m only really going off one account and from reading newspapers over the past two years, so I’m hardly an expert).
“We really did have two root causes:
1) Boom that busts to the tune of a minimum $8 trillion.
2) A banking system without deposit insurance.”
Except “cause” 1) isn’t a cause – it’s the effect, namely, the bust. ???
“So, if this analysis is correct (and I would insist that it is in at least a broad brush manner) we can now see where we should be directing our attention in order to have the better regulation that we desire. Not better, not necessarily more.”
As I think I’m going to have to end up repeating to a few people – yes you are right; better does not (necessarily) equal more. My main contention in the OP was that libertarians would have to accept SOME regulation – I want to stake that as a claim dictated by the logic of basic libertarian positions. Now, I then want to say “and more regulation is also likely to be desirable”. But you are right, the two claims are different. And I’m not competent to judge if “better” will indeed mean “more”.
“BTW, as an aside, I may indeed be a nut case classical liberal but the difference between one of those and a libertarian quite possibly resides in the admission that yes, banking really is different.”
Interesting; I hadn’t thought about such a distinction in these terms. Thanks.
“So my solution would be a mixture of less regulation (near complete deregulation of the land market) plus more regulation (deposit insurance) leading to better regulation.”
Sounds like a sensible, Intelligent Classical Liberal position. Whether it’s correct or not, or whether it’s ultimately desirable, is for others to judge, I think.
“I do regard all the moaning about bonuses, Robin Hood Taxes, the evils of speculation and so on as people proving the reality (as opposed to the way she describes it) of Naomi Klein’s Shock Doctrine. We have these bugbears buzzing in our brains, here’s a crisis, let’s use it to attack what we don’t like.”
I’m with you on this, actually. I find the RHT to be a real irritant – it’s wrongheaded, purely politically motivated and from what I can tell pays no attention to actual economic factors or thinking (Christ, they didn’t even bother to find out about the incidence of their proposals til what, 3 weeks after they started hawking it around?). I’m with David Hume: you win fights when you pick them in the right places – RHT and simple banker-bashing are the wrong places to pick fights.
Paul Sagar said,
March 18, 2010 at 12:31 am
Luis,
Thanks for all the links – I’ll make an effort to click through them.
“I can’t say that I understand what is (or isn’t) the libertarian position on the existence of dysfunctional free markets (do they deny they exist, or perhaps think that attempts to cure will always be worse than the disease?)”
Good point. I should have brought out the distinction more clearly. I guess I want to say that both positions are over-simplistic, and I suspect that they are normally both motivated by partisan dogma and ideology. Though i suppose that’s ultimately going to be an empirical claim which is only confirmed by seeing what libertarians ultimately end up saying in response to such issues.
“My feeling is that there are a number possible regulatory reforms of the financial system that would keep the good bits and remove bad bits, and that in principle sensible libertarians ought to endorse reforms that help free markets to function better, which is what I think you are arguing too.”
Yes, that is what I’m trying to argue too. Thanks.
Jimmy,
“As for the Unreflective Libertarians that you refer to who might claim that crashes would be averted if there was no regulation, I’m not sure that their position is quite as ludicrous as you suggest. This is because what these type of people actually argue for is not really a market with no regulation, but a market with just a few very strict regulations. These regulations would include a currency backed by gold, 100% reserve banking, and the abolition of central banks (this isn’t really a regulation I suppose). They would say that within such an institutional set up actors pursuing their own interests couldn’t create a bubble as huge as the housing bubble.”
I’m afraid I don’t really see how that defeats my points above. It still seems to fall back to “this kind of structure is immune from the law of unintended consequences” – which I find very dubious indeed. By contrast, we have empirical evidence that regulating finance in some ways diminishes the worst kinds of crash or disaster.
As for your second point about regulation and staying one step ahead of the bankers – again, I’m not saying that regulation is going to be perfect, always get it right or always be that step ahead. What I want to say is that making the effort to at least try seems to have better and more desirable outcomes than not so trying.
I’m certainly sympathetic to breaking up the banks – but that seems to me a policy-supplement to improved regulation, rather than something that is independent of, or an alternative to, better regulation.
Paul Sagar said,
March 18, 2010 at 12:36 am
Richard W,
Thanks for that – lots of food for thought.
Straus,
“It seems to me that one problem with the bail-out is that it has allowed what might be a fundamentally flawed system to endure without serious reform. And I don’t just mean the financial system. Might not one result of the crisis taking its course have been to significantly reduce the influence and attractiveness of the City and to allow other parts of the economy to prosper, if only because more bright people would be drawn to them.”
Indeed. But I’m afraid here I’m with David Hume: the risks of allowing a full-scale collapse are just too terrible to run. If things went tits-up following a no-bailout scenario, they would go REALLY tits up. And whilst certainly the bail-out has produced bad consequences, and we are still losing a major opportunity for reform almost daily, I think the overall position I still want to stick to is that “bailout better than no-bailout”…even if I think we could have gotten a much better bailout than we actually did.
Jock et al – I’m going to try and get back to you tomorrow (busy busy!)
Tim Worstall said,
March 18, 2010 at 7:02 am
““Northern Rock, for example, went down from having provided mortgages” – 125% mortgages, let’s not forget. Yes, Rock over-exposed themselves. But they were also playing the derivatives game (from what I understand).”
Depends what you mean by “derivatives”. They weren’t as far as I know, playing with futures or options. They didn’t have piles of CDOs from other issuers. They would borrow on wholesale markets, short term, issue mortgages, then bundle those mortgages into bonds which were sold on to investors through Granite. Rinse and repeat.
Yes, their underwriting of mortgages was, umm, suspect, but the failure in the model came when the wholesale markets would no longer fund. Not what is normally thought of as “derivatives”. And no matter what Ritchie says, it wasn’t Granite that caused the problems. It was not being able to fund mortgages before they were placed in Granite.
“There is, therefore, a question about responsible lending practices”
Sure. But this, in my view, is linked to the land market.
“I think I partly agree with this – but the collapse had an awful lot to do (or so says Tett) with the use of CDSs, or more precisely, CDOs of ABS. That pretty much everyone except JPMorganChase piled up way too many CDOs of ABS, and hence when the mortgage market went downhill, so much debt in the banks turned toxic.”
Some, yes, but recall what actually happened here. The various CDOs were sliced up and distributed. The bit that the banks thought was safe (the AAA tranches) is the bit that they held on to. It’s this that crippled them when the market turned.
What is the suggestion (from the FSA, from the EU and yes, even the Yanks) for the future? That any originator of a syndication must hold on to a tranche of the loan they are syndicating. 5% is often mentioned.
But the reason the banks fell over is because they held on to chunks of their syndications. If they’d sold the whole lot on to investors, insurance and pension finds etc, there would still have been the losses in the financial system, yes, but not a run on the banks. So current suggestion to prevent a run on the banks is that they must do what just caused a run on the banks?
Don’t forget, the banks really did believe those AAA tranches were safe. If our regulation aim is to prevent a financial system collapse then we should be banning the holding of a tranche, not insisting upon it.
We should at least be looking for better regulation, nu?
Paul Sagar said,
March 18, 2010 at 11:02 pm
Given the silly amount of stuff I’ve got on, I’m downgrading my promise of replying to everyone to an “aspiration”.
if it’s good enough for Tory tax policies, it’s good enough for Bad Conscience.
donpaskini said,
March 18, 2010 at 11:34 pm
Good post.
I dunno about bank regulation, but am a bit sceptical of a couple of the underlying assumptions here.
Firstly, the UK would have gone into recession when everyone else did after the dot com bubble burst if Brown hadn’t increased public spending and let the housing price bubble grow, so there is more to the story than ‘deregulated finance capitalism = 15 years of growth’.
Secondly, it is certainly the case in the USA (dunno about the UK) that post-Reagan deregulated finance capitalism led to lower rates of economic growth than what Krugman calls the “Great Compression” between 1945-73. The American economy grew faster when top tax rates were 98% than when they were 33%, for instance.
So it is not clear at all that increased regulation means less super-growth capitalism, let alone that there would have been negative impacts upon all our lives.
You make the point that Intelligent Libertarians will have noted that a significant constraint on their preferred policy outcomes are that democratic governments can’t implement them because they are staggeringly unpopular. I wonder if the logical implication of this for the Intelligent Libertarian is not to support greater regulation of financial markets, but to conclude that democratic government is part of the problem, and that instead more countries should adopt the pro-growth policies and governance structures of China.
Richard said,
March 18, 2010 at 11:57 pm
“and that instead more countries should adopt the pro-growth policies and governance structures of China.”
There are certainly libertarians who take a dim view of democracy (such as Hans Hermann-Hoppe in Democracy: The God That Failed) because they see it is having the potential to infringe on liberty and strengthen the state. Any “libertarians” who support China’s policies are not libertarians – China is an oppressive regime with a great deal of government planning. Economic growth isn’t the objective of libertarianism, which is why you will often find libertarians putting private property rights before economic “efficiency” – there would be no high speed rail in the UK under a libertarian government if compulsory purchase orders were required for example. Yes there are people who call themselves libertarians who are actually apologists for forms of corporatism/state-capitalism but such people should be called out for what they are.
Jock said,
March 19, 2010 at 12:27 am
Dan:
“Firstly, the UK would have gone into recession when everyone else did after the dot com bubble burst if Brown hadn’t increased public spending and let the housing price bubble grow, so there is more to the story than ‘deregulated finance capitalism = 15 years of growth’.”
It sounds to me as if you think this is a good thing! Quite the opposite. Since a recession is the clearing out of malinvestments indulged in during a boom, this decision of Brown’s (and similar monetary decisions on the other side of the Atlantic to try to soften the post.com recession), which one might add, given the timing was a *politically* expedient move above all else, is the main cause of the current crisis. The divergence of asset prices (and broad money supply) from the underlying economic indicators from 2000/01 onwards is a startling indictment of this policy and clear evidence that politicians should not be allowed anywhere near these “levers” of the economic system.
Not only that, but because of where the bulk of that loose money went, ordinary people were robbed while the economy was on the rise by increasingly unaffordable housing costs and robbed on the way down as these then collapsed.
And the man had the hubris to claim to have “abolished boom and bust”. Frankly he deserves his head on a pike.
And as Austrians would I suspect say, all this is what you get when you try and run your economy by reference to an entirely artificial and inhuman indicator such as GDP growth via political manipulation of the currency.
Jock said,
March 19, 2010 at 12:34 am
PS – with some self-indulgent smugness though – please note the date on the blog post linked to in the previous comment. When people tell you such-and-such an expert was calling this recession in “early 2007″ or whatever – remember the date on that chart, and the fact that that was me gathering evidence for something I had been concerned about and trying to warn people about for two or three years at that point. :)
Tim Worstall said,
March 19, 2010 at 8:04 am
“Secondly, it is certainly the case in the USA (dunno about the UK) that post-Reagan deregulated finance capitalism led to lower rates of economic growth than what Krugman calls the “Great Compression” between 1945-73. The American economy grew faster when top tax rates were 98% than when they were 33%, for instance.”
While Krugman is indeed a Nobel Laureate that’s a masterpiece of noting correlation over accurately identifying causation.
Even Krugman finds it very difficult indeed to say “led to lower rates” rather than “coincided with lower rates”.
One thing we do know is that productivity grew extremely strongly through the 1929-1945 period. And that there was very little economic growth (I tend not to think that building things to blow them up really qualifies as such).
Near 20 years of pent up strong productivity growth when unleashed into a finally peacetime economy is going to lead to pretty impressive economic growth for some time.
whatever you tax rates.
donpaskini said,
March 19, 2010 at 11:39 am
Hi Jock,
“It sounds to me as if you think this is a good thing!”
Increased public spending = good thing
Housing bubble = bad thing
Neither are examples of deregulated finance capitalism
Jock said,
March 19, 2010 at 12:51 pm
“Neither are examples of deregulated finance capitalism”
Indeed not. They are examples of how political action sparked a boom (despite it’s denying the very existence of “Boom and bust” of course) which, in the system we have, will *inevitably* end with a bust. This recession was not *caused* by “deregulated financial systems”. It may have been exacerbated by it, but actually caused by a politically created asset boom of the worst possible kind – one that put the necessaries of life out of the reach of many people.
Whether increased public spending is “A Good Thing” of course is a matter of opinion, and not just amongst those of us who believe it can *never* be a good thing – if the money has not been spent wisely and produced the results claimed for it when it was expropriated it, like much else in a boom, is “malinvestment” whether you are pro- or anti- public spending.
And clearly setting off a housing boom and then having to spend money making more and more housing affordable is a double whammy, though I acknowledge not the biggest element of the increased public spending.
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