Questions to Ponder

Questions to Ponder March 2, 2009

From Bryan Caplan:

All ideology aside: If the government had followed a laissez-faire policy for the last six months, and output, employment, housing, and financial markets stood exactly where they stand today, what fraction of people would conclude that “Events decisively prove that laissez-faire is a disaster”? Can you honestly give any answer less than 90%?


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  • Not really a question many have time to ponder after George the Hun left us with a smoldering carcass of a country. And that’s just the US. Iraq wishes it could aspire to smoldering carcass status.

  • That’s kind of weird, because the last 6 months (and more) have been ALL about the fallout from a ruinous laissez-faire policy.

  • Mark DeFrancisis

    It’s like asking about the first doasage of chemotherapy after carcinogens have been dumped into a (now cancerous) body for 8 years.

  • blackadderiv

    That’s kind of weird, because the last 6 months (and more) have been ALL about the fallout from a ruinous laissez-faire policy.

    I think you’re making Prof. Caplan’s point for him.

  • Mark DeFrancisis

    Correction: in your hypoothetical it would be like more carcinogens…

  • Huh? I’m reading the facts. Or as a man wiser than I out it, it resulst from “these fundamental errors that have been revealed in the failure of the large American banks; the error at the basis of it is human greed.”

  • No, MM, you’re applying your interpretive filter to the facts. You think that laissez-faire policies are destructive, therefore you look at the last eight years leading up to this current crisis and conclude that we were too laissez-faire and thus created the current crisis.

    Someone who was strongly laissez-faire would look at the same facts and reach an entirely different conclusion: perhaps that all of the artificial market interventions in from 2000 to the present (lowering interest rates to near zero to stop a 00-01 recession, overly strong government incentives and subsidies towards home ownership mortgages, banking rules that encouraged the creation of AAA securities which were not in fact AAA, etc.) and claim _that_ was what was at fault.

    That you find laissaz-faire policies so obviously at fault for the current problems tells us a great deal more about your opinions than the problems themselves.

  • Sorry, Darwin, I’m living in the reality-based community– monetary policy might have fueled the fire, but the easy transfer of a global savings glut into extraordinary levels of leverage and associated asset price bubbles was due to lax regulation, pure and simple– and that philosophy of “self-regulation” assumed that market mechanisms would lead to the best outcomes. In other words– laissez faire.

    Here is a short sample of the loopholes: banks were allowed to push assets into unregulated SIVs; banks were allowed to use their own internal risk assessments to comply with capital requirements; credit ratings agencies were allowed to advise clients on how to structure products that attain the best rating; huge parts of the shadow banking system were not regulated at all; mortgage originators were allowed to offload all risk from mortgages. The result: massive risk, massive leverage, massive greed (as the pope would say).

    This is not really news to anybody outside that weird subculture of the American right that thinks simplistic Reaganite mantras are the solution to all economic woes.

    And by the way, the man I’m quoting above is the pope. For, as you will recall, this critique of laissez-faire policies dates all the way bacl to Leo XIII and is firmly part of Catholic teaching.

  • jonathanjones02

    There is much blame to be found, I think, in noncontroversial “bipartisan” consensus. Sailer is right on the money with this and his articles on the economic collapse. And if anyone wants to quibble, that’s great, but how about with quibbling with any of the many numbers and details he draws out? You can’t have government and lenders racing to raise homeownership by more than ten percentage points in short periods of time without some very serious, very dire, consequences. But when everyone was getting paid and feeling good about themselves, well, who cares right?

    http://vdare.com/sailer/090301_mortgage_meltdown.htm

  • How is anything laissez-faire, when Bush Inc., with Democrat support rather frequently, actively enabled all this ? When every legislation rigged the system in unabashed favor of this madness ? When the government was another junkie via Freddie&Fannie ? That’s not justletting “them” do as they please, that’s being “them”.

    Of course that’s what laissez-faire, which must sound especially creepy said with a twang, really means to its advocates anyway. It is much like watching a gang rape, commenting, “Let them have at it, rapists best know what to do with their penises.”

  • How many times does one need to point out that this Sailor person does not know what he is talking about? For God’s sake, he is still trying to blame poor people and minorities for what happened. I’m sorry, but this is the “Joe-the-Plumberization” of economics. How many times do we need to debunk the fact that the CRA was not behind the financial crisis, and in fact CRA loans were pretty well behaved? How many times do we need to point out that the subprime boom happened exactly when Fannie and Freddie were losing market share, and that only a small percentage of losses are attributible to these entities?

    No, this is an old story we have seen time and time again. If you combine a lot of liquidity with few regulations, you will get a credit boom and an associated collapse.

  • wj

    It’s Carter’s fault! It’s Carter’s fault!

  • MM, isn’t “few regulations” the wrong way of putting it ? There obviously are regulations, they just favor pillage, plunder and binging.

    That way of phrasing it actually plays into the hands of “conservatives”, since nobody likes to be “regulated”. It portrays “conservatives” as “freedom-lovers”, when in reality they merely issue a license to make a killing.

  • blackadderiv

    One problem with blaming the crisis on “laissez-faire” is that other countries – the ones with the sort of “smart regulation” that people critical of the U.S. system wish to implement here – are being hit even harder by the crisis than the U.S.

  • blackadderiv

    Oh, and while MM and I don’t agree on a lot, we do agree about Sailer. The man is a crank.

  • Defenders of capitalist orthodoxy need to ignore and/or smokescreen the obvious in order to push it. If it weren’t so deadly, it would be hilarious. Maybe we could call it kill-arious.

  • jonathanjones02

    MM: mischaracterization, name-calling, and an unwillingness to engage any of the detail he and more than a few others have been consistently drawing out. Okay, then, let me ask some direct questions…

    – how exactly is it that a massive lowering of credit standards since the late 80s have not contributed very directly to this crisis, at the direct and indirect prompting of government to “expand opportunities,” of which the lenders were happy to play along so long as they got paid and some of their instiutions were allowed to merge?
    – how exactly is it blaming “minorities and poor people” when it is extremely easy to see the huge discrepencies in foreclosure rates, and to notice the states in which much of the trouble is concentrated? How exactly is it blaming “minorities and poor people” to suggest that the policies that got us to that point – policies that are extremely easy to find out about with the steady stream of documents that Sailer and many others have been highlighting – should not be repeated, and that it may be a good idea, for example, to encourage savings of at least 15 percent before purchase?

    There’s a lot more, but I don’t have much time to goof around on the Internet as much as I would like, so let’s start here.

  • Blackadder, that Cato piece is just dumb. It’s not only about trade channels, it’s about financial channels. This crisis has taught us a lot about interlinkages. The roots of the crisis was in the US subprime housing market; the result of the crisis was a lockdown in financial markets, and that was global. Part of the problem of course was that plenty of foreign banks gobbled up US asset-backed securities on the grounds that it was a great deal. Plus, they thought AIG was insuring their losses. Note also that foreign countries were not just passive victims: countries from the Baltics to Iceland went on a credit-fueled spending binge, even larger as a percent of their economies than in the US.

  • MM,

    To be clear, I’m not trying to make the case that the current downturn definitely is a result of the factors I listed. I’m not in a position to know that — though some of what I’ve read and heard by people I would otherwise rely on suggests to me its reasonable that they were certainly factors. What I’m trying to be clear on is more that _you_ don’t necessarily know that the downturn is strictly and primarily the result of “laissez faire” either.

    You think that to be the case because of how you apply your interpretive framework to the facts, but it’s not proveable from the facts. That’s what bothers me a bit about how you like to put these things, that you like to state things in such a fashion as to suggest that there is no other possible reasonable interpretation of the known facts other than yours.

    On the quote from Benedict (I thought I recognized it — the clunky English translation is a dead give away) it strikes me that if you’re trying to use that to argue that the “Catholic position” on the downturn is that it was caused by a lack of regulation, you’re overstretching the meaning of the quote. It doesn’t strike me as remotely controversial that greed (and pride) are at the root of this trouble as of many others. But greed and regulation are not necessarily opposite poles.

  • blackadderiv

    Blackadder, that Cato piece is just dumb.

    With respect, this strikes me as an evasion. Whether or not you buy the argument about causation, the fact remains that 1) the higher levels of regulation in places like Europe didn’t stop those countries from getting involved in the boom, and 2) now that the bubble has popped, the downturn in worse in those countries than it is in the U.S.

  • The tentacles of the USA reach everywhere, it’s simple 😛 Not to mention that greedy idiots aren’t solely at home in the USA, it’s merely the most favorable habitat.

    Not to mention that business isn’t categorically different abroad. It’s a matter of degree. On the average, pillage and plunder are more actively facilitated in the USA, whether it’s the hilarious lack of employees rights or rolling out the red carpet for latter-day Vikings.

    Blackadder’s just mad cause his toy broke itself.

    Throughout history one thing is true (Leonard Cohen)

    Everybody knows that the dice are loaded
    Everybody rolls with their fingers crossed
    Everybody knows that the war is over
    Everybody knows the good guys lost
    Everybody knows the fight was fixed
    The poor stay poor, the rich get rich
    That’s how it goes
    Everybody knows

    Everybody knows that the boat is leaking
    Everybody knows that the captain lied
    Everybody got this broken feeling
    Like their father or their dog just died

  • Speaking of the Cato institute, Paul Krugman notes an “almost eerie correlation between conservative praise two or three years ago and economic disaster today.”

    “Reforms have made Iceland a Nordic tiger,” declared a paper from the Cato Institute. “How Ireland Became the Celtic Tiger” was the title of one Heritage Foundation article; “The Estonian Economic Miracle” was the title of another. All three nations are in deep crisis now.”

  • jh

    I guess pox on everybody’s houses

    Though I have major probems with Obama’s plans I am not willing to call them Socialism as some want right do. I might change my mind in a year though

    MM you are just as wrong with your use of the term “laissez-faire” and as lax as the the rampant use of Socialism by the far right. I guess there shall be a race to see of your misuse of the that term and your other bogeyman Calvinism!!!

    This all gets so moring. Lets use red herring terms that about 95 percent of the populance has no understanding of

    Words at some time must haver a historical context. Can we agree not to abuse them so not to confuse and to score political points. At least for the sense of sane dicussion

    Neeldess to say we are not in a Lai

  • jh

    “the average, pillage and plunder are more actively facilitated in the USA, whether it’s the hilarious lack of employees rights or rolling out the red carpet for latter-day Vikings. ”

    I guess as a former usualy Defense lawyer amd someone that engaged in employment law this has not relation to reality here in the USA

  • Matt T, the rioting Icelanders (literally rioting) just don’t appreciate the beauty of being trickled down on.

  • jonathanjones02

    Here’s yet another example of what I and those who supposedly “blame the poor and the minorities” been talking about. Almost two-thirds of foreclosures in four states. And that’s not even the “worst” of it. This is what happens when you loosen standards for nearly two decades, trying to “expand opportunities.” That may sound nice and make you feel greeeeat – but people get hurt.

    And the federal government was knee deep in this mess, as it appears they will continue to be.

    http://www.virginia.edu/uvatoday/newsRelease.php?id=7838

  • blackadderiv

    Jonthan,

    I’m not sure I follow you. The majority of foreclosures have occurred in four states. Therefore, what? How does this show that the federal government was responsible? (If anything it would seem to suggest the opposite).

    The fact that foreclosures are concentrated in a handful of states is not so surprising when you consider that 1) the housing boom was concentrated in the same states, and 2) three of the four (Arizona, California, and Florida) are non-recourse states, which means it easier for people to just walk away from their houses if they wish.

  • jonathanjones02

    Blackadder,

    Connect some dots: demographics combined with bipartisan policy to close the “gaps” of minority homeownership. This is not “blaming minorities.” It is blaming lenders, the government, and the borrowers (a lot of whom were minorities who should not have received credit). It is not casting aside the greed of Wall Street (who happily played along). It is blaming policies of regulation and “deregulation” with the same aim: closing a gap that should have not have concened us in the slightest if we would recognize that creditworthiness and a decent down payment are the way to go, regardless of the uncomfortable results to reigning ideologies.

    In California, for example, the percentage of first-time home purchasers from 99 to 06 who put no money down grew from 7 percent to about 42 percent. This, to say the least, is a problem. Now, what were the driving factors for this sort of madness? Why were the credit standards lowered so hugely?
    http://www.doctorhousingbubble.com/wp-content/uploads/2008/10/no-down.gif

    And there’s a lot more of this to draw out, which Sailer and other “icky” writers have been doing in detail.

    Look at the speeches of Bush, Clinton, Obama, Fannie and Frannie chiefs, Angelo Mozila ect. Look at their initatives. This is not “blaming minorities.” It is recognizing that a lot of people got rich for a while off of “diversity initatives,” but then that wealth disappeared and now a lot of people, minority taxpayers included, are left holding the bag.

  • blackadderiv

    In California, for example, the percentage of first-time home purchasers from 99 to 06 who put no money down grew from 7 percent to about 42 percent. This, to say the least, is a problem. Now, what were the driving factors for this sort of madness?

    That is indeed the question. But as I’ve argued before (see here and in the comments here, where Sailer himself makes an appearance), government efforts to increase minority lending don’t make sense as an explanation.

    My problem with Sailer, btw, is not that his conclusions are “icky” but that he is monomaniacal in claiming that virtually every social problem is the fault either of minorities or of PC views about minorities (a while back he even posted a comment at the blog Marginal Revolution laying out his “ethnic theory of plane crashes”). The man is a race crank, pure and simple.

  • jonathanjones02

    He may well be a “race crank,” as John Derbyshire is an anti-Catholic crank and Heather MacDonald and Mark Krikorian et al. are immigration cranks. But these are also very sharp writers who tend to write in detail about uncomfortable, un-PC subjects, and they should be read by anyone interested in their topics, just like their “opponents” Linda Chavez et al. should be read.

    Now, if the numbers in this and other articles are accurate ( http://www.vdare.com/Sailer/081010_meltdown.htm ), then it strikes me as one good explanation for the meltdown, and a good lesson for the future about letting our ideologies get in the way of sound policy (such as 15 percent or so and good creditworthiness). Either way, I hope all commentators can refrain from heat and engage as many details of arguments as possible on an Internet forum in a charitable fashion.

    I’m interested in reading your two links and will try to do so by this afternoon.

  • blackadderiv

    Gerald,

    You’ve linked to the wrong picture. The real photo of me is here.

  • blackadderiv

    Now, if the numbers in this and other articles are accurate ( http://www.vdare.com/Sailer/081010_meltdown.htm ), then it strikes me as one good explanation for the meltdown

    The linked article demonstrates, in painstaking detail, that while minorities make up 33% of the population, loans to minorities make up 35% of total mortgage dollars. Shocking. Sailer then goes on to assert (without evidence) that “it’s likely that it will turn out that the majority of unexpected default dollars, above normal trend lines, in 2007 were from defaults by minorities.” Note the use of the word ‘unexpected.’ Sailer isn’t arguing that most of the money lost from foreclosures will be from loans to minorities. In fact, if you click through the link, you’ll find another post by Sailer (written two days earlier) in which he argues (again without evidence), that mortgage losses due to minority lending “will be closer to 30% than to 15%.”

    How any of this is supposed to establish that the CRA or other diversity in lending programs were responsible for the housing bubble is beyond me.