America's Financial Mess

[brian0918]

In general, the government cannot walk away from all banks, and shrug off any credit-market panic as being "not its problem". In this post, I tried to make two points:

• the government has to "back" good banks (this raises questions about what a good bank is, and what it means for the government to "back" it, but that's the broad approach)
  
• some concrete structural change must be enacted at the same time, even the law rolls it out over time
  

Aren't you advocating pragmatism - doing what's convenient for the present rather than what's right?

Edited October 17, 2008 by brian0918

[softwareNerd]

Aren't you advocating pragmatism - doing what's convenient for the present rather than what's right?

No. I'm simply saying that one cannot make laws, allow the system to run on that basis for a century, and then drop it all overnight. The same for social-security, and many other laws. They must be unwound.

[brian0918]

No. I'm simply saying that one cannot make laws, allow the system to run on that basis for a century, and then drop it all overnight. The same for social-security, and many other laws. They must be unwound.

You're advocating rights violations now so that they might not have to occur later. You're still advocating rights violations, though.

Wouldn't it be better to stick to your principles, advocate only what's moral, and watch as people see your view and take their normal stance of "meeting you halfway"?

The problem with you choosing to meet them halfway is that you sacrifice your morality, and then they will doubtless split the difference yet again, giving them the advantage.

Edited October 18, 2008 by brian0918

[softwareNerd]

Brian, I suspect you do not understand what I meant. I was not framing the type of solution I would find acceptable, but what I'd consider way beyond good..., completely blow-your-mind unbelievably good.

[brian0918]

Brian, I suspect you do not understand what I meant. I was not framing the type of solution I would find acceptable, but what I'd consider way beyond good..., completely blow-your-mind unbelievably good.

It might be a step towards freedom, but I wouldn't openly advocate it.

Edited October 18, 2008 by brian0918

[softwareNerd]

It might be a step towards freedom, but I wouldn't openly advocate it.

I'm not able to pinpoint the exact nature of your disagreement. Therefore, I'm not sure how best to convince you. Which of the following are you saying:

• we must switch to the ideal, final-state scenario of total freedom with no transition (i.e., you think that political expediency is a reason for giving in to transition, but if we could have our way granny would not get her next social security check)
  
• only propose the ideal, final-state scenario of total freedom, and do not talk about transition, even though it would be good (not just politically expedient) to have a transition
  
• something else... ?
  

[brian0918]

I'm not able to pinpoint the exact nature of your disagreement. Therefore, I'm not sure how best to convince you. Which of the following are you saying:

• we must switch to the ideal, final-state scenario of total freedom with no transition (i.e., you think that political expediency is a reason for giving in to transition, but if we could have our way granny would not get her next social security check)
  
• only propose the ideal, final-state scenario of total freedom, and do not talk about transition, even though it would be good (not just politically expedient) to have a transition
  
• something else... ?
  

If it violates rights it is not good, so the only good thing would be to eliminate it completely, however a gradual change seems the more likely to occur (although AS would have you think otherwise, hmm...). Now I'm torn about what is the more rational move: the one more likely to occur, or the one that immediately ends rights violations.

[softwareNerd]

Okay, then we disagree, but it's a topic for a different thread. I do not think it would be moral to stop social-security checks immediately.

[Tenure]

Okay, then we disagree, but it's a topic for a different thread. I do not think it would be moral to stop social-security checks immediately.

Or to put it another way, you can't pull a man out of a coma and expect him to dance the fandango.

[sanjavalen]

SN, I think you are in error, and here is why:

It is true that you do not immediately go from statist controls to complete freedom overnight (without dire consequences to the economy.) This is why, for example, the government cannot simply say "Okay, paper money is worthless, better barter for some gold guys."

But that is not the situation here. The situation is that the government has caused a gigantic mess, due to its intervention. The answer, however, is not more government intervention. The government cannot fix this mess without creating more problems than we have already. Even in a government taken over by Dr. Brook and anyone else he chose to name for congress, the senate and the presidency, I would not say that is a good idea.

First off, not bailing the banks out would not change the law at all - as you will note, the bailout required a new law, not an application of existing law. All talks of implications aside, no private company has any legal (or moral) claim to being bailed out by the government. So your comparison to going "completely free" overnight is ridiculous - it is simply abstaining from more of the same.

I believe it's already been touched on, on why it is impossible to implement any bailout that isn't, in substance, either completely unselective or completely subjective in nature. If you bail out any bank that is in trouble, you don't really help, because the assistance itself sends signals to the market that the bank is poorly run (this is the raitonale behind Paulson partially nationalizing Wells Fargo and other healthy banks along with bad ones; an attempt to fool the market,) which will have negative effects on the bank.

In addition, it brings up questions that cannot be objectively answered - which banks are doing poorly due to government intervention, and not their own incompetence? What is "doing poorly"? What is the cutoff line for aid? How much aid does xyz bank justify? And so forth. Again - even with a government staffed by Objectivists, even with banks also staffed by Objectivists - all this would lead to is another pull-war in Washington. The implementors of a bailout would have no objective standard of judging competence, how badly the banks are doing, etc. Banks who both legitimately could say the government had caused their woes and ones that did not both would have very strong incentives to lobby these individuals with their woes. It would be business as usual in Washington - which is what we want to stop.

The proper response to the crisis is not "one last hurrah for statism, then lets get freer." It is to get freer. Take proper responsibility for the bailout, then acknowledge that any "solution" implemented would simply cause more problems. Let the devaluation of the banking industry begin and let the most successful banks come out on top. Begin to deregulate as quickly as possible. And leave this as yet another example of why, when mixing economics and state, only bad can come of it.

Edited October 18, 2008 by sanjavalen

[softwareNerd]

San, I believe you've misunderstood my suggestions, because I definitely did not say that the government should bail out banks now and then we could get to restructuring at some later point in time.

[sanjavalen]

San, I believe you've misunderstood my suggestions, because I definitely did not say that the government should bail out banks now and then we could get to restructuring at some later point in time.

Ahh, rereading them, I think I must have. I thought your suggestions for backign some banks was an endorsement of bailout plans.

Nevermind, I think we agree in substance, if not in detail - and details are for working out when it seems feasible that the substance can be implemented.

[Thomas M. Miovas Jr.]

Under the heading of McCain Decries "Socialism", Fox News has a story of McCain trying to regain the upper hand by making claims that Obama is for socialism.

"In other words, Barack Obama's tax plan would convert the IRS into a giant welfare agency, redistributing massive amounts of wealth at the direction of politicians in Washington," McCain said in the radio address.

Wow...I guess he doesn't realize he just signed a fascist act into law that redistributes $850 billion! or that Paulson just handed out $250 billion dollars. Though, I guess since the banks can pay it back later, he might be looking at it more as a loan than a hand-out. But it makes me wonder how much money does it take to get people to accept slavery?

[brian0918]

Under the heading of McCain Decries "Socialism", Fox News has a story of McCain trying to regain the upper hand by making claims that Obama is for socialism.

"In other words, Barack Obama's tax plan would convert the IRS into a giant welfare agency, redistributing massive amounts of wealth at the direction of politicians in Washington," McCain said in the radio address.

Wow...I guess he doesn't realize he just signed a fascist act into law that redistributes $850 billion! or that Paulson just handed out $250 billion dollars. Though, I guess since the banks can pay it back later, he might be looking at it more as a loan than a hand-out. But it makes me wonder how much money does it take to get people to accept slavery?

Are there that may capitalists out there who won't vote for either candidate, that he would find it politically profitable to make such a statement? After all - that's the only reason either candidate makes any statement: to appeal to some segment of the population.

[Thomas M. Miovas Jr.]

Are there that [many] capitalists out there who won't vote for either candidate, that he would find it politically profitable to make such a statement? After all - that's the only reason either candidate makes any statement: to appeal to some segment of the population.

I really don't know who McCain is appealing to. Those who hate the Democrats will likely vote for him, but I can't see how he appeals to Republicans strongly, since his recent actions of voting for the very unpopular Emergency Economic Stabilization Act of 2008 ought to have angered them. And I don't see how one would conclude that the EESA is not socialism, unless one sees it as fascism. I was watching the first Presidential debate with my parents who were visiting and they are Republicans and they say, and I agree, that McCain could have won the Presidency hands down if he would have stood up against the EESA. And I think he reaches across the isle too often -- making friends with Democrats is not what the Republican base wants; but that is one reason this race is so close, because its six of one half dozen of the other when it comes to McCain versus Obama. Obama's stance on health care and abortion is getting him votes, but both want massive government give-a-ways, its just that they differ on who gets them. And neither one is for capitalism.

[gags]

Today's Wall Street Journal has a nice piece by James Grant called "The Confidence Game". Among other things, Grant does a nice job of identifying the fact that this crisis would not have occurred under a gold standard.

http://online.wsj.com/article/SB122428355436946301.html

[Thomas M. Miovas Jr.]

In this story, evidently there was a Bill to be brought before Congress in 2005 that would have reined in Fannie May and Freddie Mac, but the Democrats killed it because they wanted minorities and poor people to be able to get houses. At the time, the Republicans had enough votes to bring the Bill to the table for a vote, until these two semi-governmental agencies gave money to key Senator's states projects.

I see this as a good example of why the government must be kept out of the economy because it tends to give certain sectors of the population a gun backed advantage over other citizens. Since Freddie and Fannie were back by the Community Reinvestment Act and other laws regarding lending money, the gun was squarely pointed at banks and other financial institutes dealing with mortgages. These guns and other policies led to the mortgage breakdown we have today.

It's amazing that it could have been stopped, but wasn't, due to short-sighted advantages their lobbying brought about. I see nothing wrong with citizens addressing their government individually or in groups, but when anti-individual rights laws are passed, that ought to be considered illegal under the Constitution (or a properly written one that would be better than ours).

[KendallJ]

Now I'm torn about what is the more rational move: the one more likely to occur, or the one that immediately ends rights violations.

I'll weigh in only because I agree with Snerd's general ideas.

Here is the principles I'm running by.

1. Regulation and state agencies such as the FED have the peculiar characteristic in that they replace private institutions that would act somewhat like they do. In a private system a few key banks would be performing the valid functions that the FED does today. Those functions many times can be critical to the proper function of the system,and they don't just spring up overnight. So to advocate the elimination of the FED without in some way providing for the creation of such institutions poses a significant risk to the system, so any transition has to take that into account. This is all I saw Snerd doing.

2. Never ever ever advocate for any transition without pointing at where you're headed. i.e. without aguing for individual rights and lasseiz-faire capitalism. If you don't you run the danger of having your "transition" plans get confused with some continued advocacy of statism.

So that's why I asked for hte context of Allison's statements about the bailout measures. Without some indication of the principles driving such a statement, then it is a disappointing statement. However, if he rationally argues for govt to do something on the basis that the private institutions simply do not exist today to handle the problem, but that they could and we should head toward a world where they would, then I don't see that as an unprincipled defense of capitalism.

Edited October 20, 2008 by KendallJ

[brian0918]

Alright, that makes sense. The only important thing in my mind is that it's clear to everyone why you're making that suggestion, and that you make it contingent on a later move toward capitalism, not simply another arbitrary experiment.

[adrock3215]

In terms of practicality, the thought that government should help these banks with the intention of moving toward a free economy is as unlikely as a "one-day, set 'em free" fix. Neither one is going to happen. In fact, the result of this crisis will be the following: government will help the banks with the intention of moving toward a less-free economy.

In terms of principles, the difference between the two positions is negligible. The principle is that government should set the economy free. The philosopher says this to the economists and lawyers, and when the time comes to do so they can best figure out how.

[softwareNerd]

Alright, that makes sense. The only important thing in my mind is that it's clear to everyone why you're making that suggestion, and that you make it contingent on a later move toward capitalism, not simply another arbitrary experiment.

I would go even further and say that a "later move" is not sufficient. The current move itself must incorporate corrections that start now. Also, such "corrections" must not be tiny little bits thrown on: like the Treasury did when it said that as part of the bailout of Fannie/Freddy they would have to cut down their book by 10% starting sometime in the future -- too little, too far away.

The problem is that the government is not merely responding to the liquidity problem. It still has not ditched the notion of minimizing pain. They still hang onto the notion that the FHA must provide poor loans, that the middle class should get subsidized mortgage insurance, that the home-building industry must be protected, that foreign buyer of agency-debt should feel they're 100% protected, and even that producers of wooden arrows for children should get a special incentive!

Basically, if you throw enough money at the situation, with zero structural changes, you will wash out the current problems. However, you simply trade them for tomorrow's problems. Already, I heard commentators on CNBC saying that since the banks took government money, it would be wrong for them to simply hold on to it...they should relax and lend. In a week, they seem to have forgotten that some banks were forced to take the money. What if these banks now started to loan this money to people they did not think were creditworthy in this environment, and what if these banks (who have shown themselves smarter than many) turn out to be right yet again? What then? I suppose, everyone will scream that now they've gone and lost the public's money!

Without structural change, no plan is worthy of support. The plans we have are worse than zero from that long-term viewpoint. They are moving things in the wrong long-term direction.

[KendallJ]

In terms of principles, the difference between the two positions is negligible.

What are you referring to Eliot?

[~Sophia~]

Regulation and state agencies such as the FED have the peculiar characteristic in that they replace private institutions that would act somewhat like they do. In a private system a few key banks would be performing the valid functions that the FED does today.

This sounds to me that (correct me if I am wrong) that some central planning is necessary in a free market. I know that there is a big difference between a private organization performing that task and a public one because the second one also has a monopoly of power. The participation in case of the first is voluntary - in case of the second is forced (as we have seen). Still I am not convinced that central planning is necessary at all when there are is no false sense of security injected (government backing of investments) and people act with an understanding they won't be bailed out of the consequences of their decisions. In times of some sort of imbalances (which I think would be much smaller in scope when there is no manipulation of the market) more organized solution maybe of benefit but I am of the belief that central planning (and guarantees of that central body) on ongoing basis would create similar financial and economic destabilizations. The degree of that manipulation is the degree of distortions (as we see in the housing situation).

If you (or/and someone who also holds your point of view) can provide more detail about why you think this is necessary in the context of a fully free market it would be very helpful.

[KendallJ]

This sounds to me that (correct me if I am wrong) that some central planning is necessary in a free market.

That would be a wholy incorrect interpretation of what I said, although I can see where one might take that read.

When I say "replace", I mean that the regulatory bodies have usurped valid free market mechanisms in their function. As such, those functions may be poorly developed if at all within the free portions of the mixed economy. The free market is perfectly capable of handling those functoins over time, but simply eliminating the entire govt run structure will leave the free market weak or underdeveloped in areas, which in the short term causes problems.

For instance, if we eliminated the FDA today, the market mechanisms that would serve to provide information regarding drug performance don't exist. There is no "Underwriters Laboratories" or "Consumer's Reports" sort of certification in drugs, but there would be. It's just that the FDA currently performs that function. The FED, in addition to it's invalid functions performs functions that in a free market woudl be performed by a few key big banks. Those banks are not set up to perform those functions today however. If you eliminate the FED without considering how to move toward a free economy equivalent, then you stand to have near term problems with the functioning of the system. That is why the transition is important.

Let me be clear. I don't think ANY central "planning" is necessary. NONE, ZERO, ZIP.

[brian0918]

Would you be supportive of neoconservative efforts that force you to use a government-funded service, but which allow you to choose who provides that service? To me that sounds like what a transitional system would look like: slowly handing individual responsibility back to the individual (at least for services that were previously total govt monopolies).