This is a great set of questions posed to me by one of my dear friends...I thought that my blog would be a great place to rebutt these arguments and share my views on the current situations.
"So, how does a champion of the libertarian philosophy of deregulation and a free market feel these days?
With deregulation and gloves-off, risk-taking capitalism being the primary cause of the crisis in the financial markets, do you still support more deregulation? I mean there has to be something fundamentally wrong with a system that gives freedom for CEOs to take risks (the bigger the better) but are not punished when these risks fail (and don't tell me they should be allowed to fail because the big losers there would be the people). The people didn't see any of the pay-offs from the risk takers when they were raking it in big, but now that they failed, the government and the taxes payers will have to bail them out. The Republicans are the socialists!"
First off, you're right: the Republicans ARE the socialists...however I am NOT a Republican, I agree whole heartedly that this is in a large part their fault...however at that point you seem to concede the same idea that I will further flush out...it seems like you are admitting that this is actually a government caused problem...not a capitalist problem.
The problem really goes all the way back to the fact that our government, since FDR and probably before, has provided capitalism with risk free or loss free capitalism. We have a government that is using it's own private entity (the FED) to transition money and cover mistakes. I definitely believe that people (both corporations and individuals) should not only be allowed to, but sometimes NEED to make mistakes, and more importantly they need to feel the effects of these mistakes. You told me not to, but i'm gonna say it anyways, THEY SHOULD BE ALLOWED TO FAIL. For many years now they have not been allowed to fail...it may take a second to realize this, but the FED is basically a private entity, now we have power and responsibility simply shifting from one private entity (the corporate sector) to another (the FED).
My main point is that we still really have not seen deregulation and free market to know if it would work....the Government has not let that happen....
Now let's get to the real world details, for it is here that my argument really heats up.
Let's take a look at Fannie/Freddie. Contrary to what the media is spinning on this topic, Fan/Fred are actually both Government Sponsored Enterprises or GSP's...what this means is that they are faux-private corporations sponsored by the government. In this case, congress created and watched over both corp's. The reason there are two would be because congress thought that they would want two in case one went under...hahaha.
Basically the two orgs acted as government middle men...they were the brokers between the public and the government for a majority (50-70%) of mortgages. This gave them a huge advantage and would ultimately be the deciding factor as to why they went under. Being backed by the Gov. gave the false appearance that they were solid and could not fail...obviously not true, but people definitely felt safe regardless. Being backed by the government gave these two a huge advantage in the market as well. They were being percieved as lower risk companies which allowed them to lower their interest rates. This created what economists call and "Iron Triangle" basically Regulators (the congressional members on a committe in charge of overseeing Freddie and Fannie), the Regulated (Freddie and Fannie) and the Federal Government are the three components that make up the Iron Triangle. What occured was that you had Freddie and Fannie making campaign contributions to the Regulators who had sway with the Government, they then allowed to Freddie and Fannie to continue to run out of control with limited oversight by those who were supposed to be doing just that...overseeing them. To add insult to injury, you had the Managers and CEO's of Freddie and Fannie making HUGE gains and basically stealing money in the aftermath. In my opinion they should pay every dime back to the taxpayers.
In a Free Market we would have not had this problem. In fact, the current situation is so far from a Capitalist market that it hardly even comes in to play. In a capitalist market we would have had an increased number of smaller competitors vying for individuals investments/business. The risks of actually being in a true free market would have forced these companies and their investors to make wiser decisions about their business and investment practices.
In short, I'm sitting back right now, saying I told you so...basically this is not at all a failure of capitalism or the free market because those ideas were never even given an opportunity to prove themselves. What we have right now is in fact a HUGE failure of Big Government controlling economics and capitalism. This is closer to a failure of socialism and government than it is of Libertarian/Free market views.
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16 comments:
The way you two throw around the word "socialists" . . .
haha...he started it (said in total second grade voice) =)
You said: "it seems like you are admitting that this is actually a government caused problem...not a capitalist problem."
It seems that you have made the common mistake of remembering the last part of my question and forgetting all the rest. I brought that comment at the very end (and rather poorly - I shouldn't have done that. And I wasn't implying that you're republican, merely that you hold some of the free-market philosophies that they do). I was pointing out the irony of the people that scream "give us a free-markets!" when times are good so they can take more risks and make more money, and now they crying for bailout.
My point at the beginning, and I will reiterate here: this current crisis is, in part, the result of the lack of government. Now the fed did fail in their monetary policy and in other areas as you mentioned, but also because it was not acting as a regulator. We need a system that holds business accountable to society and since the corporations don't listen to people, the government is the next best thing. I guarantee you, whether you like it or not, this crisis will lead to more regulation. People and articles everywhere are calling this the death of reaganomics.
"THEY SHOULD BE ALLOWED TO FAIL."
Then I'm afraid Geoff you are condemning middle class and the poor to pay for these failings. If we lived in a libertarian world this might not be the case. But here today, the government couldn't possibly let them fail. We're talking about a domino effect that would destroy the entire economy as we know it, not just these companies. We're talking about the major borrowers and lenders here (there were five now there are two) - guess who it hurts!?
You're paragraph on Bernie Mac and Freddie Mae - er...whatever. Was well noted - i did know that they were government mandated and that they were allowed to basically go outside of their mandate, run a muck and take crazy risks. You know your stuff. But what about the other private companies that have gone under? How do we blame the government for that?
Joseph Stiglitz, an economist I respect, wrote a short article on the current situation and 6 ways not to let it happen again. It's good.
http://www.cnn.com/2008/POLITICS/09/17/stiglitz.crisis/index.html
Josh: What would you call it when companies become controlled by the state and the tax payers have to pay for the losses?
...but you're right, I did kind of throw that word out there... but you get my meaning. It's a lot like if you use the term fascist - people barely know what it really means anymore but they "catch your drift".
Dan, I think that AIG is what you were really getting at, and I agree that in our current situation, had they not been bailed out, it would have been SO catastrophic...however the fact of the matter is, private companies like AIG are actually strongly tied/supported by the government. AIG basically sold "mortgage insurance"...they are called "credit default swaps" basically just a fancy term for mortgage insurance....they were selling these as added coverage for buyers of institutions like Mac and Mae...when they bust, the FED had virtually no choice but to bail out AIG...the effect would have been insanely bad.
I stand by my statement that they should be allowed to fail, however I should clarify that I mean that from the more philosophical standpoint that if they had EVER in history, especially at the beginning, been allowed to fail, or at least act as a true free/private enterprise, the outcome would have been starkly different. I am of sound enough mind though to see that in the current situations the buyout was more than necessary...but I still really believe that this was a fundamental failure of government, not a failure of capitalism.
If I can just throw my .02 in the ring here...
I read your post, yet came to completely different conclusions. Deregulation of the finance industry has been occurring for decades, but really was taken to insane heights in the 80's and 90's. Banks were allowed to circumvent the rules, and now I can't find the link, but I read earlier today that all the institutions that went under this year have been allowed to blow off the reserve requirement of the Fed. Of course, with all the cross-lending and fancy bookwork that we are now discovering lead to the demise of such institutions. This seems to me to be a failure of the idea of free-market capitalism. The fact that these banks were allowed to play by their own rules with ever decreasing oversight from the government or any other institution says to me that regulation is needed, otherwise CEO's and other power players will do anything they can to increase their profits, at the cost of legitimacy of their company.
Think about it. As was pointed out already (I think), CEO's are allowed to do whatever they want, pocket insane amounts of money for themselves, but when the proverbial shit hits the fan, they don't have to pay back anything while the middle class and lower class are left to clean up the mess, whether it be in the form of a government bailout, or a depression.
Getting slightly off-topic, which is nothing new for me, I would like to propose some possible methods to getting out of this mess. I have thought about this for the past few days, which for a 27 year old polisci undergrad student doesn't amount to much, but here goes. Since it appears that the deregulation of industries from finance to the airlines have led to constant and epic failures, it's time we put some serious government oversight back in place. It's funny, because with the lack of oversight and responsibility, we are facing a situation frighteningly similar to that of 1929, but that's a side note.
Also, since we no longer have any solid standard for currency, we need to do something to shore up the value of the dollar. No, this isn't a call to return to the Gold Standard. It is a call, however, to legislate jobs back into the country. Not only government jobs, such as those under FDR in an attempt to end the Great Depression, but private sector jobs. Increase tariffs on products manufactured overseas by American corporations trying to avoid paying higher wages and/or taxes. Make it unprofitable for domestic companies to ship jobs overseas, and thus try to stimulate production of manufactured goods here, not to even mention jobs in such areas as alternative energy research. In short, put people to work (in the private sector) and at the same time increase domestic production of goods which should have the effect of re-valuing the dollar abroad. Again, these are just some ideas, and I know the idea of regulating anything makes you nauseous, but this is just how I feel we can most effectively face this monster in the shortest time.
Aaron! very interesting insight! thanks for reading my lil' blog thingy, i totally appreciate it.
I do think that even though we had the appearance of actual deregulation, what we actually had was the government protection of a few key power players, by being in the pocket books of government officials, these power players were given a rediculous amount of freedom and false credibility. They of course abused this, and in essence we still had a messy government sticking its greasy hands all over...screwing things up.
also, I would like to point out the existence of the Community Reinvestment Act...basically telling lenders that they HAD to lend to what they considered "risky borrowers"...another misstep of the Federal Government.
Aaron - you said a lot of things I was saying only better, you're more knowledgeable about this stuff than I am.
Geoff I think problem lies in your ideas about the fundamentals of capitalism - I don't think all of them can be applied to today's world. Adam Smith had no idea what a corporation was or that they would one day be all pervasive institutions. I think he would have changed his principals and analyzed markets differently had he seen what we are seeing. You're holding to fundamentals that cannot be applied to this system.
It's going to be interesting to see what happens.
I remembered where I found the story, and I was a bit off on the details. It wasn't the fault of the Fed being lax on the reserve requirement, but rather the SEC not enforcing another rule. I can't explain it very well, but basically it appears to me to be a rule that was put in place in the 70's that acted much like the reserve requirement of the Fed, basically saying that you have to have a certain percentage of loaned money on hand in the form of deposits. Again, the article explains it better than I can, it's worth a read.
Aaron, thanks for the article definitely an interesting read.
Dan, you and I both know that a large majority of the stuff we debate will boil down to fundamentals, and at the same time that is fine, I love having these debates, after all it challenges me to flush out my ideas...
Alas, not sure how valid of an argument it is to say that a famous economist would change their perspective during current times...maybe they would maybe they wouldn't...
I would call it the failings of a flawed system.
Like pure socialism, pure capitalism would never work on the level that the U.S. is operating. Both of the systems are foolishly idealistic for anything larger than a village setting. At the root of each is freedom, it just so happens that when tended by humanity and watered by greed they both grow too quickly into fascism. The sooner that people figure that out the sooner we can move on and actually tackle TODAY’S problems. If you want either system in its pure form, get some friends together and start a commune, but if you still want to be a productive member of society, don't vote to make less fortunate people suffer.
Dan’s last point was perfectly valid and deserves a response, not to be discredited. The whole problem with following the writings of an economist who died in 1790 is that the world changes.
Please do some research on socialism. If you are saying that our current system is nothing like true capitalism, don't say it is like true socialism.
Geoff, remember that guy you said you liked Benjamin Barber. Well he just wrote an article about the current situation as well. Echoes a lot of the same things we're talking about. Since you seemed to like him I though you would be interested.
http://www.huffingtonpost.com/benjamin-r-barber/the-fiscal-meltdown-revea_b_127715.html
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