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Libertarian perspectives on the bail-out
Veronique de Rugy and Philippe Lacoude.
Please feel free to leave other references in the comments; there is a greater rush of material coming out than I can keep track of.
Addendum: Here is a (non-libertarian) dose of optimism.
Posted by Tyler Cowen on October 8, 2008 at 01:12 PM in Current Affairs | Permalink
Comments
Here's a nice video explanation by Russ Roberts.
Posted by: Christopher Monnier at Oct 8, 2008 1:28:14 PM
Shameless self-promotion: An Open Letter to my Friends on the Left
Posted by: Steve Horwitz at Oct 8, 2008 1:28:42 PM
A political philosophical perspective:
The political philosophy of bailout
Posted by: megapolisomancy at Oct 8, 2008 1:52:56 PM
I must say, CR's case for optimism is rather convincing.
Posted by: Mercutio.Mont at Oct 8, 2008 2:20:09 PM
Why are all the commentators on all sides saying the problem is not X, but Y? They should be identifying it as X and Y. Isn't it stunningly obvious that changes in regulation of leverage were a bad idea in hindsight? Isn't it equally obvious that mortgage originator and borrower fraud and perverse incentives for lenders, bankers, rating agencies - you name it - were a problem? True, it's difficult to fix the relative magnitude of all these issues, even qualitatively. But it seems that everyone still has an ideological ax to grind. Libertarians need to get over themselves with the "it wasn't really a free market" line. That's true, but the aspects that did function as a primarily free market were completely screwed up as well. You don't get a free pass, libertarians. The free market screwed up, just like it did with the dot com bubble, the biotech bubble, the conglomerate bubble, the tulip bubble, etc.
Posted by: Greg at Oct 8, 2008 2:47:37 PM
Greg is right, the libertarian lobby in this country is so powerful that they have destroyed the economy now we must try socialism. We cannot give Harry Browne a free pass on this, he obviously had as much to do with the massive liquidity injections as anyone.
Posted by: Gabe at Oct 8, 2008 2:52:35 PM
Regarding Liebowitz's comments, that prices in a speculative
bubble start to decline after the prices stop rising and the
speculators "walk away," is completely not a revelation.
Posted by: Barkley Rosser at Oct 8, 2008 3:18:11 PM
So, we just fell off a 100 story building.
At the 50th floor, I turn to you and say, boy, aren't you glad we aren't still on the roof.
Posted by: Andrew at Oct 8, 2008 3:20:15 PM
Since Tyler practically invited self-promotion...
Here is my EconLib take on all of this, and here is a sample from the American Experiment collection entitled, "What's a Free Marketeer to Think?" (You can follow its links to the entire collection of essays from a bunch of, well, free marketeers.)
Posted by: Bob Murphy at Oct 8, 2008 3:22:34 PM
1) The problems in the housing market and the wider financial crisis are traceable to multiple causes and responsibilities . . . as is the case in nearly every complex situation in human affairs. That's why economists, like political scientists and other social scientists, are trained to use multivariable regression techniques in modeling --- just as they look for multiple causes and try to weigh them qualitatively, if good quantitative data aren't available, in case-studies.
……………..
Government’s Culpability
Fannie and Freddie were pushing for more and more housing mortgages and insuring them --- without proper credit-analysis and down-payments for low-income subprime mortgages, not to mention proper risk-analysis --- and hence bear some responsibility for the current financial crisis . . . now global in reach.
Democratic and Republican administrations both bear responsibility, in turn, for pushing the two private/public agencies to extend housing at lower credit-ratings and subsidized lower interest-rate mortgages. And lots of banks and powerful brokerage and independent mortgage firms --- no doubt credit-agencies too --- were lobbying heavily for these relaxed standards.
……..
The Fed
The Federal Reserve in the early part of the decade played a role too. It kept interest rates low for a good two years or so after the recession was over. That encouraged a lot of new debt by businesses and households alike, not to mention a leverage surge in financial institutions world-wide.
…………..
Financial Markets
Financial markets and especially new innovations --- such as various derivatives like CDOs (collateralized debt obligations)and credit-swaps and the repackaging of all these to pass risk along by financial enterprises to some other enterprise down the line --- emerged recently, were totally opaque once they entered the long chain of linked trading world-wide, and ignored basic principles of credit-analysis and risk-management.
Similarly, banks and other powerful financial institutions heavily lobbied Congress and the administration not to regulate these new financial innovations. That problem didn’t start with the Bush-W era. It goes back to the Clinton administration, which --- when pushed by some government agencies to see if they should regulate these new derivative and highly leveraged instruments --- said flatly, no: too many brilliant financial experts, they were told, had invented these instruments, and who is the government to interfere.
………
Free-Market Fantasies: Fundamentalist Ideological Knee-Jerk Responses by the SEC and the Bush administration
The SEC in the William Donaldson era --- Donaldson a good head commissioner, appointed by President Bush --- bears a big responsibility for its 2004 decision to allow investment banks to heighten their leverage from 10:1 to upwards of 30:1.
And the 5 big investment banks --- down to 3 now (and not all independent) --- were at fault for burdening themselves with some dubious assets, mostly related to subprime housing mortgages . . . all rebundled, with an effort by each financial group in the long global-chain of creditors-insurers-borrowers striving to pass on the risks of these high-risk assets to someone else further along the global chain.
Republican Congressmen and sympathizers in the Bush administration --- pushed by banks and others --- were wrong to then get rid of Donaldson in 2005. His sin in their view? He started siding with the Democratic two Commissioners on the SEC, all three convinced that the agency should try to extend its regulatory powers to the
The SEC in the Chris Cox era from 2005 was responsible for its failure to use its regulatory powers at its disposal . . . something Cox himself has just fessed up to. He was wrong, he said recently, to believe financial markets were self-regulating.
……………
3) The Outcome?
Si monumetum requis, circumspice
………
Michael Gordon, AKA, the buggy professor
P.S. The key point here is set in observation 1) above and is methodological.
Namely? To analyze a remarkably complex human-made set of events and behavior that contributed to the current financial crisis with reference to one cause only --- or to single it out as the overwhelming cause, compared to which all the other are minor and secondary --- is the habit of fundamentalist ideologues, whether on the left or the right.
What social scientists have to do is some day, especially as more information becomes available, to try sorting the complex of related causes and weighting them . . . either statistically if possible, otherwise by measured and evidence-laden case-studies. Or both ideally. (Alas, the statistical modeling will probably involve logistic regression techniques --- or probit (a variation) --- where the dependent variable is qualitative: crisis yes or no.
Most logistic regression --- which uses the logit transformation to turn a non-linear model into a linear one --- is extraordinarily sloppy. (One statistician in the early part of this decade looked at the top 10 economic journals and found about 75 articles over the previous decade that used logistic or probit regression. ALL 75 were erroneous methodologically, leaving aside data-set problems and proxies etc.
Posted by: the buggy professor at Oct 8, 2008 3:33:42 PM
But the market did self-regulate this. We just don't like the result.
Even with their completely non-self-interested, lily white, only caring about the people selves, the government didn't do as much to point out what was coming as did market participants themselves such as Mike "Mish" Shedlock, Bill Bonner, Warren Buffett, and George Soros.
I remember this vividly. Ironically, I was working on my shed, so it had to be about two years ago, listening to a podcast and Mish Shedlock asked "have we ever had a soft landing." People who want the regulators to head off these things want what never was and never will be.
Posted by: Andrew at Oct 8, 2008 4:12:05 PM
http://www.lewrockwell.com/blog/lewrw/archives/023404.html
I know people don't want to hear it, and maybe he didn't get all the details right, give him a break, he's a doctor, but he's basically the only government guy who was outspoken in presaging the crisis.
Posted by: Andew at Oct 8, 2008 5:15:56 PM
What we think is good are institutions that play to the self-interest of private actors by rewarding them for serving the public, not just themselves. We believe that's what genuinely free markets do.
Oh good lord, how does one get tenure with such a rudimentary understanding of what markets do? Markets as institutions do not solve the misalignment of private and social returns. They increase the number of privately beneficial exchanges. The benefit of market exchange over planned exchange is that, if private and social returns align, it creates more social surplus by being better at locating opportunities for mutually beneficial exchange. That doesn't mean it mysteriously solves the private-social misalignment that comes into play if the marketed commodity is fraught with externalities, information asymmetries, or a combination of the two.
Posted by: ogmb at Oct 8, 2008 6:03:26 PM
Andrew,
Why is it that the supposedly "free market people" here don't want to hear what your saying?
yet they believe that Paulson is to be trusted and "this bailout is better than nothing"? I really don't get it.
Posted by: Gabe at Oct 8, 2008 6:25:45 PM
The Stan Liebowitz article points a particular finger at the shoddy research of Alicia Munnell at the Boston Fed in a 1992 study that had broad influence on governmental practice in loosening lending standards. I distinctly recall that in the 1980s, Munnell had an exchange in the New York Review of Books with Pete Peterson (Concord Coalition) over Social Security in which she said that the program must be kept universal and compulsory, or else it might lose its political support. Peterson called her on this exercise in the tail wagging the dog, but to no avail, just as Liebowitz' dissection of her Boston Fed study was to no avail.
Bearing in mind the prominent role of Barney Frank in pushing the Fan and Fred envelope, the more one reads about this crisis, the more one concludes that it is yet another example of bad Massachusetts ideas being inflicted willy nilly on the rest of the country.
Posted by: Voltaire in '08 at Oct 8, 2008 7:52:34 PM
I wrote this before the bailout passed but I think it still stands up. Originally published at Real Clear Markets:
http://joesbraindepot.blogspot.com/2008/10/trust-capitalism.html
Posted by: Joe at Oct 8, 2008 7:53:56 PM
I ask again:
When are the free market fundamentalists such as Tyler going to admit that the failure to regulate under existing law is the proximate cause of the mortgage mess and consequent freezing up of the credit markets?
I guess I shouldn't hold my breath. Tolstoy said it best:
I know that most men, including those at ease with problems of the greatest complexity, can seldom accept even the simplest and most obvious truth if it be such as would oblige them to admit the falsity of conclusions they have reached perhaps with great difficulty, conclusions which they have delighted in explaining to colleagues, which they have proudly taught to others, and which they have woven, thread by thread, into the fabric of their lives.
Posted by: HCG at Oct 8, 2008 8:26:08 PM
http://www.forbes.com/opinions/2008/10/06/congress-nozick-bailout-oped-cx_rae_1007epstein.html
at volock
Posted by: k at Oct 8, 2008 8:27:13 PM
Steve Forbes had some interesting comments in his magazine about the current crisis. He blames mark-to-market accounting. I guess the banks should have put their securities in hold to maturity.
Posted by: jorod at Oct 8, 2008 9:03:37 PM
HCG asked:
I ask again:
When are the free market fundamentalists such as Tyler going to admit...
What are you talking about? Are you a frequent reader? If so, have you noticed that at least a dozen of us chastise Tyler daily for being a sellout to true libertarianism? Man alive, he's getting it from both ends.
Posted by: Bob Murphy at Oct 8, 2008 10:24:34 PM
The Leibowitz paper is embarrassing. While it does a fine job explaining the sources of the housing bubble, it fails to trace the causal connections between the bursting of the housing and the turmoil in financial markets.
Instead, it offers a truly sophomoric argument: "We are experiencing one of the worst financial panics in the post-WWII era. EVERYONE KNOWS that the increase in mortgage defaults has been the primary driver for these financial difficulties."
Why is it true? Because everyone knows it. Horrible.
Posted by: Sean at Oct 8, 2008 11:05:41 PM
The Leibowitz paper is embarrassing. While it does a fine job explaining the sources of the housing bubble, it fails to trace the causal connections between the bursting of the housing and the turmoil in financial markets.
Instead, it offers a truly sophomoric argument: "We are experiencing one of the worst financial panics in the post-WWII era. EVERYONE KNOWS that the increase in mortgage defaults has been the primary driver for these financial difficulties."
Why is it true? Because everyone knows it. Horrible.
Posted by: Sean at Oct 8, 2008 11:06:12 PM
The Leibowitz paper is embarrassing. While it does a fine job explaining the sources of the housing bubble, it fails to trace the causal connections between the bursting of the housing and the turmoil in financial markets.
Instead, it offers a truly sophomoric argument: "We are experiencing one of the worst financial panics in the post-WWII era. EVERYONE KNOWS that the increase in mortgage defaults has been the primary driver for these financial difficulties."
Why is it true? Because everyone knows it. Horrible.
Posted by: Sean at Oct 8, 2008 11:06:25 PM
The Leibowitz paper is embarrassing. While it does a fine job explaining the sources of the housing bubble, it fails to trace the causal connections between the bursting of the housing and the turmoil in financial markets.
Instead, it offers a truly sophomoric argument: "We are experiencing one of the worst financial panics in the post-WWII era. EVERYONE KNOWS that the increase in mortgage defaults has been the primary driver for these financial difficulties."
Why is it true? Because everyone knows it. Horrible.
Posted by: Sean at Oct 8, 2008 11:06:38 PM
Bird on a Wire: As if they were passenger pigeons of old, the government has tricked and slain securities firms. Now they want to do it again.
Excerpt:
"What's the last bank or corporation that failed—small or large, financial or manufacturing, or any other type—and then actually caused the entire free market to shut down?"
Posted by: Phil at Oct 8, 2008 11:21:18 PM
