Over on What's Wrong with the World, we've had another thread about the bailout. I've come out firmly on the side of government's not bailing companies out and not insuring everybody and his uncle. My basic position is that we only think that government can fix these things, whereas in fact the attempt to have the government make wealth out of nothing to save people from the consequences of their actions only makes the bubbles bigger and the falls harder in the long run. I suppose occasionally we might get away with doing stupid things, but you keep doing stupid things long enough, expecting Uncle Midas Sam to create gold out of lead and save you every time, and eventually it catches up with you. Basic Austrian economics stuff, which I gather appears totally crazy to most people. (And which I realize, if applied, would cause a lot of pain to innocent people as well as careless ones, simply because our present economy has been built on a bubble of national debt and empty government promises, and it would be highly unpleasant to admit that to ourselves now rather than pushing it off onto future generations, forcing them to admit it after the illusion is bigger still.)
Anyway, among other things, some of our commentators (and at least one of my fellow contributors) at W4 want to blame the financial crisis on "unregulated capitalism"--that is, the risky derivatives market that is crashing down. Scorn is heaped on what seems to me the perfectly reasonable point about the push to lend to those who are not credit-worthy and the way this spread into the mortgage market and the economy as a whole. But beyond that, no attempt is made on the part of those who say this is the fault of capitalism to factor in the perverse incentive of the expectation of bailout. Sure, people are greedy. And they may do unsustainable and economically foolish things, hoping to get personally rich, if they think they can get away with them because the government will catch them when they fall if their shenanigans get so big and complicated that their fall would harm lots of innocent people. Basically, it's holding the nation hostage for a bailout. Nice. Very human. But not capitalism, by a long shot. In this context, I typed the following comment, with which I'm very pleased, but for which I haven't quite gotten the standing ovation I was hoping. So here it is, for my small and discerning reading audience here at the ol' personal blog:
It hardly seems reasonable to call it "capitalism" when financiers do crazy, unsustainable things having the "too big to fail" idea in the back of their minds. One of the whole points of capitalism as I have always understood it is precisely that it takes advantage of the hard facts of cause and effect rather than trying to make consequences go away. Bailouts negate the entire real-world, reality-check idea that is absolutely fundamental to capitalism. Calling speculative, unsound money transactions undertaken with the assumption that the government will borrow money and get you out of the soup if things go wrong "capitalism" sounds to me like saying that Junior is "hunting" if he goes out, shoots wildly at trees, shoots himself in the foot, Dad pays the medical bills, and finally a dead 10-point buck that somebody else shot is delivered to the front door with "Junior's deer" on a tag attached to its antlers.
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Sounds like a pretty good comment to me. The hunting analogy is clever and you can consider this my standing ovation. Of course, you realize I'm totally unqualified to comment on these matters.
I have heard it reasonably argued, btw, that the problem, re Freddie and Fannie, e.g., was not "unregulated capitalism", but too much regulation. Democratic ideologues were shielding these companies from oversight, in service to their desire that unqualified buyers be brought into the housing market. See the 2004 House hearings on youtube, with Barney Frank, Maxine Wawa, and Gary Meeks bellowing their slander at a guy whose job it was to point out shoddy accounting practices. His reward for doing his job well was a rain of insults.
The _claim_ is that the crisis wouldn't be as big as it is if this were the only problem going on. But here at least I think they use an underestimate by talking about "how many loans were made under CRA"--which evidently was the particular bill. But this reckons without the direction action thuggery of ACORN-style groups on the banks. It also, as I understand it, ignores the way these things move out into the larger economy. Once you start encouraging banks to lend to uncredit-worthy borrowers, they are going to do it for people of all races. The whole standards of credit get skewed across the board. And it was already, I gather, a practice to package loans and risk on loans and sell these packages, so the risk introduced at the bottom level is then multiplied on up the chain in these various packages. Whether this can explain the _entirety_ of the present crisis I'm not qualified to say, but Step2's continual mention of "how many loans were made under CRA" simply doesn't get at the root of even that particular issue.
Moreover, let's suppose that banks and other lenders _wanted_ to lend to the credit-unworthy in some cases, make a fast buck, and then scram with the cash before everything came tumbling down. That sort of business activity cannot be profitable in anything like the long run unless it is assumed that the government will (in essence) print money (or create electronic money) and bail out the financial industry. Evidently the whole financial industry went on a crazy spree, and now, sure enough, the government has fulfilled the expectations. But how in the world can that be capitalism? I mean, that's like saying that it's "capitalism" if some company makes lousy widgets and the government comes along and pumps money into it to keep it going when people won't buy the widgets. It's just the same thing in a different area.
Now, I know why they are doing it and I understand what Paul Cella has said: The whole thing has gotten so huge and has implicated so much of the economy that people who _haven't_ done these things will be hurt badly if the government doesn't bail out the people who _have_ done these things. That's bad news. But it doesn't mean that the hostage-takers were engaging in "capitalism," either. I don't understand why this isn't self-evident.
ACORN wasn't responsible for this mess. Yes, it played a small part, and yes, the legislation which forced banks to lend to less-than credit-worthy borrowers was just plain dumb. The results of this financial crisis have their roots in the cultural failure of the West and the world. Borrowers, bankers and investors were imprudent, stupid and greedy. But everyone was expecting a bailout should things have gotten bad. The great theme in 20th Century western social policy has been to divorce action from consequence, making somebody else pick up the pieces of my mistakes.
For years we have been giving massive amounts of money to the undeserving poor who have acted stupidly, why the angst at giving it to the undeserving rich?
The banks play a unique role in a capitalist system be being the mechanism through which capital is allocated. I actually think that they should be keep alive so that the conduits of finance are kept open. Lots of businesses run on short term loans. However they should not be run by the same fools that have driven them to the ground. The worst part about this bailout is that the idiots who made the mess get to stay in place, whilst still on the gravy train. There is no responsibility for their actions, nor a demand from government for accountability.
Let GM burn. Let all the business that have made malinvestments fail. It's the Darwinian basis of capitalism. The fiscally prudent survive, the stupid don't. Phases of economic contraction are integral to the capitalistic process.
As for the innocent workers, they're not. Given the democratic right to vote, paid in price by the blood of hundreds of thousands of soldiers, voters had a moral responsibility to vote intelligently. They have misused the right. For years the public has been voting for morons and just plain evil men. Economic laws which would have stopped the current crisis would have been voted down by the public, if they had been give a chance. The leaders of your current Congress and administration were freely voted in. The public knew what it wanted, and now its going to get it, good and hard. The real world involves pain. Not everyone gets a pony.
Google David Walker, the former head of the GAO. It makes for hair raising reading.
Well, I think you and I are on much the same wavelength, SP, except that I'm not so sure of the size of the role played by ACORN. (I have heard that they literally set goals of the percentage of loans that they wanted banks to accept and that they used to threaten direct action against the banks--sit-ins, for example--if the banks didn't in each year accept a higher and higher percentage of loans. It went up such-and-such many points every year, and of course it was just in that forced window that there were more foreclosures. So that's pretty striking.)
In any event, I do think that there has to be a correction, maybe even by this time a very big and painful one. You just can't get something for nothing. I don't want to be thought a gold-standard nutcase but I have to say that the Mises type people are making a lot of sense to me nowadays. When you really believe that money can and should be constantly created literally ex nihilo by the government, either in the form of print or in the form of electronic out-of-nowhere credits to banks, then naturally you don't see any limits anywhere. The whole economic system loses its natural cause-and-effect balance, because everyone assumes that the government can literally just _make more money_ out of thin air and rescue us when the bubbles burst. That _cannot_ be healthy, and I can't believe it can go on forever, either.
I'm very sympathetic to the Misean arguments. But they only provide a partial explanation and and what I feel is an imperfect solution for the current events.
The roots of the current crisis are cultural not economic, something the Miseans tend to gloss over. Economic activity is secondary to the cultural environment in which it operates. Bad morals make for bad economics. Prudence is destroyed when there are no consequences for imprudence. Something I alluded to before.
Over at calculated risk there is a three part video from Peter Shiller, I think he nails the causes of the current crisis accurately(Part 1), though I disagree with his solutions.
We need a return to virtue economics, in a Teddy Roosevelt sort of sense.
Oh, and by the way, as I understand it, at their peak, house prices in the U.S. reached about 4.5 times average income. Here in Australia houses are about 7 times income, our government's policies are totally different to yours. What we do share however with yourself and Britain, is an contemporary Anglo Western culture.
Our morals need to improve before our bank balances are going to get better.
Well, I tend to think that what we need are what I might call distinctively economic virtues. Prudence is certainly one of these. A dislike of debt is another. An iron conscience against buying things you can't afford and then sticking someone else for the bill is another--and the absence of that last virtue can be found at all levels of economic activity.
Interestingly, one could find these virtues in people who lacked other virtues. It does less harm to the economy and to the overall atmosphere of economic virtue for a man who is greedy to earn the money for the mansion and yacht he does not need honestly and to pay cash down for them than for a man who is ascetic in his general lifestyle to go through graduate school on student loans and then default on them when, as might have been predicted given the major he chose and/or his objective abilities, he cannot get a job, and to do so with no sense of horror or remorse at all at being a deadbeat.
Sometimes when people think in terms of virtue and vice in economics, they think of things like "being greedy" or "not paying your workers enough," for example. I think the problems we're running into here are caused by a somewhat different set of vices, a set that, indeed, people often don't recognize as vices: "But everybody has car debt." "But nobody knows what the items on the derivatives market are worth." "Of course it isn't true that you can't stay out of trouble by spending more than you earn." And so on. People who are virtuous in other ways can have a blind spot when it comes to these economic virtues, and people who are not particularly good or selfless can nonetheless have a very good sense of the point of that verse in the Bible where it says "owe no man anything" and can be bothered by irresponsible economic behavior as much as they would be bothered by a bad itch--because they have bourgeois notions of responsibility and prudence ingrained in them, whatever their other faults.
While remaining totally unqualified to comment, I sympathize with this from SP:
"The worst part about this bailout is that the idiots who made the mess get to stay in place, whilst still on the gravy train. There is no responsibility for their actions, nor a demand from government for accountability."
I'm still not aware of a single person who has suffered a penalty of any significance.
I think a lot of us are in one sense unqualified to comment. But if representative self-government (in the value of which I firmly believe) is to have meaning, neither we nor our representatives can be too diffident about these matters. The experts haven't exactly got a shining record on this matter. And I think in this area I trust the instinct of a poor man who will walk a mile to pay back a penny he owes over the expertise of a multi-millionaire who shrugs off Lincoln's maxim that you can't stay out of trouble by spending more than you earn.
And of course you are right about consequences. Myself, I would be almost satisfied if the greatest consequence these people suffered was that no one ever listened to them anymore and that all their policies that even _helped_ to get us into this mess were undone post-haste. But even that isn't happening.
The experts haven't exactly got a shining record on this matter
You are correct, they really don't. Up to a year ago, the consensus opinion was, that all was fine and dandy. The countervailing opinion was dismissed by the mainstream as some form of mental illness and totally ignored. You are probably more right with regard to economics that Alan Greenspan. Feel free to comment liberally.
Well, I tend to think that what we need are what I might call distinctively economic virtues.
It is true that a man can be both good brothel keeper and a good business man; but all of us are mixtures of virtue and vice. Economic activity basically involves transactions between different parties, so the issues in question deal with property rights, promises--in the form of contracts--and truthfulness. Economic virtues are the second order consequences of good morals.
Good men will strive to keep their promises, tell the truth and see it wrong to steal; they are inherently bourgeois. The problem in the West however, is that Marxism and Keynesism have entrenched themselves culturally and white-anted these traditional notions. They should be seen for what they are, not just an attack on traditional economics, but traditional morals as well.
Prudentially considered debt has it's uses, but it should be taken on in a culture which sees it as dishonorable not to pay it back. With regard to economic irresponsibly, it's going to thrive in a culture which has encouraged separating action from consequence. Automatic forgiveness without contrition fosters vice. Privatising profits and socialising losses is not going to foster economic strength.
Actually, SP, I wasn't thinking of a brothel keeper so much as of Scrooge. Scrooge's vices are bad and likely to land him in hell, but they aren't the kind that weaken the economy. Mr. Micawber, on the other hand, is a sweetheart and a great character, but his vices are exactly the sort that, if widespread, are dangerous to the economy. I wonder how often the traders on Wall Street said, "Something will turn up." Grin. In fact, part of the problem with a Mr. Micawber is precisely that he doesn't care enough about the fact that not paying your debts equals not keeping your promises, and that you should therefore be very sure you don't go into debt unless you have good prospects for repaying. Obviously, Mr. Micawber doesn't think this way, and Dickens glosses over these vices by making him such a wonderful and sympathetic character.
I don't know so much about the whole "privatising profits and socializing losses" thing. When I've seen that phrase used, it often is along these lines: "Employers who don't pay their employees enough are privatising profits and socializing losses, because society as a whole will have to pick up the slack to enable their employees to live." Now, there are just a lot of problems with this, beginning with the fact that some people _do_ work multiple jobs, so this whole chain of reasoning tends to treat the employee as more or less an infantilized, helpless being who must be "taken care of" either by his employer or by welfare. I realize that statement probably puts me at odds with Catholic social teaching, but oh, well, I'm not Catholic. In any event, it does seem to me that the whole "living wage" debate is orthogonal to America's present and severe economic woes. It isn't at all obvious to me that employers who paid higher wages would have led to less of an economic crash. Indeed, in Detroit the problem is just the opposite: The employers are being bled to death by contracts that require them to pay such high wages that they are unable to flex with market hard times and keep going. So now they are yelling for a bailout.
Both Scrooge and Micawber are detrimental to the economy. Scrooge hoards capital while Micawber has none to lend. Admittedly our society has been harder on Scrooge than Micawber. I think both deserve derision equally.
As for the living wage. I've never been a proponent of the living wage being payed by the employer, so I guess I'm with you on that matter. However, I certainly don't want to see destitute virtuous people out on the streets. I've often felt that some form of Government allowance or private charity, could make up the difference between paid employment and whats termed a living wage.
As for the U.S auto makers, I agree to a certain point, that unionised workers are hampering business profitability, but there does seem a lot of fat to trim before we start cutting wages. Corporate salaries could take a drastic cut, executive perks could go away as well. The corporates fly rather nicely at GM.
U.S automakers generally produce substandard automobiles when compared to other manufacturers. Issues about design, fuel economy, reliability etc are the product of management decision. The U.S automakers have been on the skids for a while due to the dumb decisions of highly paid management. Workers can only assemble what management tells them to build.
By the way, up till about the 70's, the U.S was able to pay the best wages in the world to its workers and still have high business profitability. I don't have the exact figures but I believe that Japanese factory workers are paid more the U.S factory workers.
Over here in Australia, a rather large cannery was going to go under. Both the management and workers took a pay cut to keep the business profitable. It was bitterly opposed by the Unions but there was nothing they could do about it. The business survived.
Fine, so they should both take a cut. But as you say, the unions would never allow it if they have a say in the matter. Talk about a parasite that kills its host. And how dumb that is, too.
On Scrooge, we're not actually told where his money is. It could be in the bank. The story doesn't say it's under the floorboards. That's Silas Marner. But I haven't yet figured out the impact on the economy of many Silas Marners. I'm _fairly_ sure it isn't as bad as the impact of people who borrow money and abscond without paying back.
For your pleasure, Lydia. The Paradox of Thrift.
Oh, well, Keynes. Why should a raving Austrian like me listen to him? :-)
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