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January 12, 2008
Competition is a Discovery Procedure
Don Boudreaux
My friend (and co-blogger at Market Correction) Andy Morriss yesterday sent this excellent letter to the Wall Street Journal:
Sirs,
David Wessel warns that “the business model for big U.S. banks is broken” and that if bankers don’t devise a better model Rep. Barney Frank will (“How to unbreak the banks,” Jan. 10). Mr. Wessel is correct that most banks’ business models are not currently producing profits, but this is not cause for concern for anyone but their shareholders. Markets are a discovery process, with firms and investors learning as they try new ideas and react to changed conditions. What markets need is a stable regulatory environment, in which every dip in the market does not produce a new set of rules. Unfortunately, there is little evidence that Rep. Frank and his comrades on the House Financial Services Committee understand this, making it virtually certain that they will rush to “solve” the banking crisis with new legislation. The best assistance Rep. Frank could offer would be to commit his committee to resolute inaction for an extended period of time, offering both banks and investors the assurance that the rules of the game would remain unchanged and allowing them to learn from their experience in the market place.
Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
Professor, Institute for Government and Public Affairs
University of Illinois
I here emphasize only that Wessel's suggestion that someone specialized in winning elections to Congress (such as Rep. Frank) could possibly develop a better business model for banks is ridiculous. It's like supposing that a crocodile, observing some misfortune visited upon an owl, could sensibly develop a better way for birds to behave.
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Comments
I agree with the gist of this article, but Frank is hardly the first Financial Services committee chair, and the last one's tinkering with the rules is not sacrosanct. Stable laws don't imply stable markets. Regulations themselves can destablize markets. Do we write counterproductive regulations in stone in the name of "stability"? This vague prescription, which the doctor would rewrite if he objected to a particular regulation, is hardly useful. I don't want bailouts of borrowers or creditors, and I don't want credit instruments unduly limited, but I expect someone to reconsider existing regulations in light of recent events. "Do no harm" is one thing. "I prefer the last guy's regulations" is something else.
Posted by: Martin Brock | Jan 12, 2008 8:51:59 AM
Andy Morris says “most banks’ business models are not currently producing profits, but this is not cause for concern for anyone but their shareholders.”
This is right except for that all of the rest of the world might now have to chip in order to save the banks. Rep. Frank is not concerned with “banks’ business models”; he and many of us are concerned about banks and society.
For instance when Andy Morris says “Markets are a discovery process, with firms and investors learning as they try new ideas and react to changed conditions.” I would totally agree and so the first order of the day should be to get the credit rating agencies out of our hair, having been put there by the regulators.
Don Boudreaux says: “I here emphasize only that Wessel's suggestion that someone specialized in winning elections to Congress (such as Rep. Frank) could possibly develop a better business model for banks is ridiculous. It's like supposing that a crocodile, observing some misfortune visited upon an owl, could sensibly develop a better way for birds to behave.
I do not understand why he is so condescending when we have just seen how the most financially educated and sophisticated owls have been able to mess things up so much for the owls. It could very well be they need a croc to give them a different perspective.
Posted by: Per Kurowski | Jan 12, 2008 10:19:54 AM
If Rep. Frank is knowledgeable enough to develop a better business model for banks, why is he wasting his time and talent in politics? He would improve his own welfare as well as that of society if he quit Congress and opened his own bank -- a bank and banking model that would work, or not, based on its merits rather than the fact that it is imposed by force.
Posted by: Don Boudreaux | Jan 12, 2008 10:41:09 AM
Ahhh Per Kurowskiduck,
You leftslingers are amazing in your ability to take a thought and a sentence, twist it, and make it sound like something else entirely, which you then denigrate as if it was the original.
Don said, "It's like supposing that a crocodile, observing some misfortune visited upon a(sic) owl, could sensibly develop a better way for birds to behave."
Which you changed to, "why he is so condescending when we have just seen how the most financially educated and sophisticated owls have been able to mess things up so much for the owls. It could very well be they need a croc to give them a different perspective." Which is a complete mangling of what Don said, and what he conveyed in what he said.
Shall I help you out and make it clear just how your limited intellect did its socialist twist?
Okay I will, thanks.
"misfortune visited upon a owl(single member of a species), could sensibly develop a better way for birds (inclusive term for all feathered, egg laying, forelimbs developed into wings animals) to behave."
In kindergarten terms just for you leftslingers: What Don said was that Barney Frank's postion was like that of a Crocodile seeing misfortune happen to an owl(single animal of a large species) and believing it could construct rules that would be good and equiable for each individual member of all the species of the entire branch of animal called birds.
What Don clearly said (clear to those of us who read) was that:
The crocodile (Barney Frank) would have to be of colossal arrogance to believe that he had the capabilities to do see misfortune to one owl and create good, rational, and equiable rules not just for that one bird nor for the millions of other owls, but the thousands of other species of birds which include untold millions of individual birds in each species.
But, that is the arrogance of of the socialist faithful. The Socialist Church teaches that one socialist evangelical can think for millions of non-believers and do so fairly and equally so that milk and honey shall be spread throughout the land and all shall live in social harmony forever under the God of State.
If nothing else the posting of yourself, muirduck, Gilduck, Martinduck, and STRduck prove the relentless truth that the world's education system is failing by producing so many people who can not read because they are so deficient in word skills, and then they are utterly incapable of thinking about what they think they read.
Posted by: vidyohs | Jan 12, 2008 10:56:45 AM
Nice, vidyohs! (again)
I would add only this:
It’s called PRICE DISCOVERY.
It’s where supply and demand, and buyers and sellers, meet.
Duh.
Posted by: Mesa Econoguy | Jan 12, 2008 11:31:01 AM
“It’s called PRICE DISCOVERY. It’s where supply and demand, and buyers and sellers, meet. “
Posted by: Mesa Econoguy | Jan 12, 2008 11:31:01 AM
Absolutely! The market! Where thousands of criteria interact and balances out…AND NOT where a couple of lazy credit analysts in some credit rating agencies with an almost monopoly right to impose their criteria and invoices workout.
When are you poor free market preachers wake up to the fact that the free markets you thought existed did not exist at all but that in fact the financial system has been the subject of the mother of all regulations in mankind…namely that to order them, by means of minimum capital requirements for banks; and prohibiting them to go where they would like to go.
Now when indeed have all the reasons of the world to be confused about how your visions of the world starts to crumble, then it is of course normal that, in desperation, some of you…we all know who…as adolescents, recur to foul language in order to gain courage…like whistling in the dark.
Posted by: Per Kurowski | Jan 12, 2008 12:00:05 PM
Per,
Is it ironic that when US banking is having tough times you point out that it is not a free market? And your point is, what, that non-free financial systems can have problems? Wow, that is insightful. Thanks.
The way to improve a non-free market is to make it more free, not to heap more regulation and bad oversight on it which winnows the amount of players who can compete for business. Your years of experience in this field should have taught you that lesson.
This current credit crunch will pass in a year or so. But I doubt you will come back here touting how the strength of the US economy can endure credit problems far better than other countries.
Posted by: Python | Jan 12, 2008 12:26:32 PM
“The way to improve a non-free market is to make it more free, not to heap more regulation and bad oversight on it”
Posted by: Python | Jan 12, 2008 12:26:32 PM
And what am I saying? Exactly that! Place one single percentage minimum capital requirement on all credits for the banks instead of having multiple of percentages that all depend on the criteria of some very few credit rating agencies.
Or is it really that you think that because the government has outsourced the risk-measuring to the private sector, then this is not a regulatory infringement on the freedoms of the market? If so…I guess there is little to be gained by further discussions. To me a regulatory bureaucrat is a regulatory bureaucrat whether he is in public or private employment, whether he works in the US or is outsourced to Bangalore.
Posted by: Per Kurowski | Jan 12, 2008 1:08:35 PM
Per,
You did exactly what Murthaduck (the children they've killed in cold blood) does when presented with a solid rebuttal: you pretend it's not there.
Care to enlighten us as to why we should trust Rep. Frank's solution to the 'crisis' when he's too big of a chickenshit to put his own money where his arrogant, socialist mouth is, as Mr Boudreaux pointed out?
Posted by: brotio | Jan 12, 2008 3:41:18 PM
Per, prices (theoretically) incorporate that information, so information discovery is part of the process (prices are a form of information).
I’m not sure what the rest of your highly confused post refers to….?
You seem to be saying that 1) markets aren’t truly free (true), 2) they are highly regulated (many are, also true), and 3) the presence of regulations and requirements nullifies the free-market proposition (wrong).
Regulations do not invalidate the information contained in prices, and indeed prices, when allowed to adjust, more accurately convey information than any other mechanism.
Posted by: Mesa Econoguy | Jan 12, 2008 4:08:37 PM
Now, the issue at hand at root level is moral hazard, and whether or not having lenders of last resort and even basic regulations is 1) necessary and 2) desirable.
I sit the fence on this one (and get shot from both sides); I don’t know the answer to that, and there probably isn’t one. Andy Morriss’ letter above is exactly correct in that markets react to regulatory changes (often to circumvent them), and the more changes, the less efficiency and more friction.
I work in financial markets, so I get to witness this every single day.
I do know that letting thousands of independently operating parties and entities decide is far more efficient than letting a discombobulated speech-impaired queen with a 3d grade intellect.
Posted by: Mesa Econoguy | Jan 12, 2008 4:24:37 PM
Very well said, Don.
Per, if the crocs can teach the owls a thing or to, then let them step up and try. The only metric of success is their status in the marketplace; without economic calculation, any legislative "solution" from the crocs cannot be judged as being beneficial or not. If the crocs muck things up terribly, most people will never know, and their legislation will remain!
Posted by: G | Jan 12, 2008 4:56:04 PM
Can you say "predatory financing"? That's an easy enough target, I guess, but remember, NO ONE WAS FORCED to buy a home, new or used.
No, the banks were suckered by their own policies - barely-disclosed ARM financing terms, thus increased housing demand, rising home equity, euphoria that good times could continue forever - until the rates started adjusting.
And homeowners? The smart ARM-ed ones saw the crunch coming and sold at a nice profit, or else bit the budget bullet and refi'ed at a fixed rate. The others--and the banks as well--learned the old Econ 101 lesson. The hard way.
And those of us with longterm fixed mortgages saw our property values balloon, then fall back to sane values. Have I lost money? No, not in relation to my home's purchase price.
Posted by: True_Liberal | Jan 12, 2008 5:23:16 PM
Andy Morriss wrote: "Mr. Wessel is correct that most banks’ business models are not currently producing profits, but this is not cause for concern for anyone but their shareholders. Markets are a discovery process, with firms and investors learning as they try new ideas and react to changed conditions."
Which seems to imply this profitablity is the result of the invisible hand (markets). Has he forgotten the government is backing deposits at these institutions not shareholders?
The Fed (supposedly independent of government) can wreck any bank model by simply inverting the yield curve.
Dig deeply and you will realize bank profit/loss are only slightly the result of markets or business models.
Don wrote: "If Rep. Frank is knowledgeable enough to develop a better business model for banks, why is he wasting his time and talent in politics? He would improve his own welfare as well as that of society if he quit Congress and opened his own bank -- a bank and banking model that would work, or not, based on its merits rather than the fact that it is imposed by force."
Perhaps Frank can improve his own/societal welfare more in Congress than in banking so has made a rational choice?
The banking model needs to change to a system that is more 'market based'. I am disappointed to see a site such as this fighting against such changes.
Bernanke introduced the TAF which opens access to Fed funds to all depository institutions not just the 20 or so primary dealers. The TAF is a small step in the right direction that needs to be followed up with additional steps.
Why defend the status quo which has obviously failed?
Posted by: Winslow R. | Jan 12, 2008 8:02:22 PM
Yes Winslow R., Rep. Frank is a banking genius and he deliberately entered Congress, sat idle for decades, just so he could be in power when a banking crises developed. That is much more rational and effective than Don's suggestion that he start a bank if he knows so much about banking.
Winslow, you are not really far off from the point of Don's post. You correctly identify the problems caused by regulators (FDIC, FED, etc.). Don sees these, and the ones likely to be caused by Rep. Frank and says "no mas". You see these flawed intereferences and say, "keep trying boys".
No one, not even Don is suggesting the status quo is fine. The position of this blog, and most readers, is that Congress will only make it worse.
Posted by: Russ Wood | Jan 12, 2008 9:47:37 PM
"No one, not even Don is suggesting the status quo is fine. The position of this blog, and most readers, is that Congress will only make it worse."
So Congress will only make it worse?
I had an exchange with Jude Wanniski a few years back. He had the same glum outlook.
Are people better off than they were 200 years ago? Are people better off than they were 30 years ago? Will they be better off 10 years from now?
While you may claim that the improvements to the human condition were despite governmental efforts, I'd have to ask why is Brazil, which for a long time has lacked an effective government and has many natural resources, worse off than the U.S.? Why do countries that lack effective government, such as Sudan, languish in squalor?
Point, some governments are better than others. I believe we still have the ability to make our laws better. With the attitude that Congress will only make it worse, what path does that leave you?
Posted by: Winslow R. | Jan 12, 2008 10:29:00 PM
Winslow R.,
The countries you mention do have significant governments (about 20% of GDP, bigger than the USA had for a long time). The USA's various governments, while perhaps not directly doing anything useful, do prevent other, more destructive, governments from taking their place.
Also, the bulk of modern government spending is largely redistributive. Other countries can easily have "smaller" governments than the USA, while still having just as strong property rights protection. This is especially true if the government fails to protect property rights against non-governmental aggression, such as warlords and other criminals.
Posted by: G | Jan 12, 2008 11:02:14 PM
Russ Wood: "No one, not even Don is suggesting the status quo is fine. The position of this blog, and most readers, is that Congress will only make it worse."
Right. So if last year's Congress adopted a single regulation handing the whole system over to Mao Zedong, then our best course this year is to leave it alone. That's just a little to simplistic for me. Details please.
Posted by: Martin Brock | Jan 13, 2008 12:32:45 AM
"So if last year's Congress adopted a single regulation handing the whole system over to Mao Zedong..." - Martin
I think you pretty much summed up what Democrats would like to do, Martin. Only they don't call themselves Mao any more.
Posted by: brotio | Jan 13, 2008 12:41:41 AM
"Also, the bulk of modern government spending is largely redistributive. This is especially true if the government fails to protect property rights against non-governmental aggression, such as warlords and other criminals."
So the purpose of government is to protect property rights?
I hope you would agree then that people with property should pay for that protection. I also hope that you would agree that people with the most property would pay the most for that protection. Bill Gates might top the list of intellectual/real property holdings so would be expected to pay the most in taxes?
Intellectual property is tricky though. I'm sure banks have the idea that they have intellectual/real property that needs protecting and are willing to pay for it.
Who is to decide how much to charge for this protection? Who is to write the rules that will determine when/where/how that protection will be provided?
Are you willing to pay for the protection of your property? Are you willing to elect/pay the representatives that will write/enforce/judge the laws that determine the cost of this protection?
Mr. Frank is concerned banks have already crossed the lines that have been drawn offering protection. Why should other taxpayers pick up the cost just because people think acting would make things worse? Sounds like certain bankers would benefit from such inaction.
BTW, my motto is "the purpose of government is to govern".
Posted by: Winslow R. | Jan 13, 2008 12:54:49 AM
brotio: "I think you pretty much summed up what Democrats would like to do, Martin. Only they don't call themselves Mao any more."
Democrats ... Republicans ... same difference. Details please.
Posted by: Martin Brock | Jan 13, 2008 1:02:29 AM
Well, there still is a bit of difference between the two parties - idiotic energy bill or not.
I haven't heard a Republican declare that they were going to take the profits of an entire industry as Hitlery did. I haven't heard of the Republican party championing the single-payer government-run health care that The Swimmer has been bleating for ever since he climbed ashore at Chappaquiddick. Finally, unilateral personal disarmament is not a Republican Party plank as it is with the Democrats.
Posted by: brotio | Jan 13, 2008 2:28:55 AM
Winslow R.,
I hope you would agree then that people with property should pay for that protection. I also hope that you would agree that people with the most property would pay the most for that protection.
Certainly, I agree. This is one reason why I don't mind progressive taxes so much; the rich tend to use government more than the penniless (how often do you hear about cops sticking up for the homeless?).
Are you willing to pay for the protection of your property?
Yes.
Are you willing to elect/pay the representatives that will write/enforce/judge the laws that determine the cost of this protection?
No, I am not willing to surrender my ability to bargain with various service providers of property security. I am not willing to sign a contract which would require I pay whatever my providers say I must pay, and which would keep me from switching providers. However, seeing as how the providers of security have all the guns, I don't have much choice in the matter. So I try to make the best of the situation.
Why should other taxpayers pick up the cost just because people think acting would make things worse? Sounds like certain bankers would benefit from such inaction.
They shouldn't. However, this phenomenon has little to do with congressional "fixing" of banks' business models. Admittedly, current policy is to bail out banks, through the Fed, and Fannie Mae's and Freddy Mack's subsidized losses. I'd start by auctioning those last two institutions off to the highest bidder, giving the proceeds back to taxpayers. I'd also remove the Fed's legislated monopoly on legal tender.
I agree that certain actors in the mortgage industry crossed the line by committing fraud (albeit under tremendous incentives to give out more loans due to extremely low interest rates). These actors should be punished, if it is possible to do so. I do not see what additional regulations are needed, however. Fraud is fraud is fraud, and I think its been illegal for a long time.
BTW, my motto is "the purpose of government is to govern".
Well, thats rather tautological, although its not something I agree with. However, accepting your definition for the sake of argument, my question is: to govern what and how? And are you sure that government is the best entity to govern what you believe needs to be governed?
Posted by: G | Jan 13, 2008 5:33:40 AM
I agree with G. What exactly is 'governance'?
Posted by: Gil | Jan 13, 2008 7:22:47 AM
I think G's response is particularly compelling.
Responding to Gil, ideally, "governance" is a set of rules that everyone understands, agrees to beforehand, and have the moral force of suasion to help with enforcement. Every society, business, and playground has a governance of sorts, almost all of which is informal. Common law works very effectively as the backstop. Government statutes may be useful icing on the cake, but may just as easily ruin the rest of the cake.
In politics, "governance" is whatever the political establishment or political entrepreneurs can get away with in convincing the minimum necessary people to give their ideas the force of law, backed by state power. The quality of such governance is purely in the eyes of those in power.
In an unconstrained democracy, which is the unfortunate state we are approaching, "governance" is basically rule by the politician who currently guides the mob. Fortunately, our democracy still has a huge inertia, institutional and social, built into it to prevent such politicians from acting like dictators. The most damage to our country occurs when that inertia is temporarily stripped, as in FDR's first hundred days when his sweeping policies were rubber-stamped by a pliant congress. Thank god for a still-functioning Supreme Court, at least in the early years of his Presidency. Who knows where we'd be now. Every wannabe FDR is certainly itching to having us find out.
Posted by: M. Hodak | Jan 13, 2008 9:26:28 AM
Martin:
You illustrate a wonderful point with your Mao argument. Think, why is the prospect of Mao controlling economic regulation so scary? It's precisely because he would undoubtedly impose a constantly changing vision, with never-ending 'adjustments' and 'plans' -- a situation where investors know nothing of the future state of regulation, and act accordingly.
The idea of a dictator wouldn't be so bad for the economy if that dictator declared a set of rules (no matter how unjust) and stuck with them for ever. It's exactly the prospect of changing the hands that hold the reigns that would make things uncertain. One Mao wouldn't be bad, so long as he stuck to the rules he imposed, and there weren't 200 other Mao's waiting to impose their vision.
Latin America is a perfect example of this. They have ineffective government, but not because it does nothing, but because it is constantly changing hands and undoing what it had previously done. Scary, and impossible to invest successfully in.
Posted by: Wojtek | Jan 13, 2008 9:35:04 AM
"Regulations do not invalidate the information contained in prices, and indeed prices, when allowed to adjust, more accurately convey information than any other mechanism."
Posted by: Mesa Econoguy | Jan 12, 2008 4:08:37 PM
Absolutely! The problem though is when regulation tinkers with information…such as ordering so much of the financial markets to heed the opinions of some few credit rating agencies.
Do you never reflect on where you find yourself? On the one hand the credit rating agencies when threatened with being sued because of their mistakes literally defend themselves by saying that they only give “opinions” and that their opinions are protected by the First Amendment, while at the same time…your government…your regulators, are forcing you to use those same opinions for instance as a basis to establish how much capital a bank should have or whether your pension funds are allowed to invest in a security or not.
Posted by: Per Kurowski | Jan 13, 2008 10:24:19 AM
"So if last year's Congress adopted a single regulation handing the whole system over to Mao Zedong..." - Martin
I think you pretty much summed up what Democrats would like to do, Martin. Only they don't call themselves Mao any more.
Posted by: brotio | Jan 13, 2008 12:41:41 AM"
brotio,
It is apt that martinduck would choose a dead man to use as an example......dead man, dead theories.....as you suggest it would be by handing democrats an unopposed congressional power.
Posted by: vidyohs | Jan 13, 2008 10:54:01 AM
G wrote" I'd start by auctioning those last two institutions off to the highest bidder, giving the proceeds back to taxpayers. I'd also remove the Fed's legislated monopoly on legal tender."
Fine and dandy but instead of evolving you'd destroy decades of case law and/or institutional wisdom. The stability of our society is based on gradual change not revolutionary change. Personally I'd like to see an opening up of access to Fed funds to every American citizen. TAF's opened up access to every depository institution, next step every citizen. Gradual evolution.
G wrote: "However, accepting your definition for the sake of argument, my question is: to govern what and how? And are you sure that government is the best entity to govern what you believe needs to be governed?"
What:
The people that form the society in which we live.
How:
By a system that has been created/improved/defended by our forefathers and is now ours to evolve further to meet our needs.
No, I'm not sure it is the best system available but to get to that 'best' system I'm willing to allow it to gradually evolve through the rule of law rather than a revolutionary process of change.
Banks crossed the line and Barney Frank will not be doing his job if he just sits idly by. His job is not to create a model for banks to make profits but rather a framework that defines the societal boundaries within which banks must work in order to keep those profits.
Posted by: Winslow R. | Jan 13, 2008 12:35:47 PM
Winslow R. says :
"His [Barney Frank] job is ... to create ... a framework that defines the societal boundaries within which banks must work in order to keep those profits."
I guessed I missed that part in the Constitution. Maybe it is up to interpretation but I don't believe that Congress has the job of defining who can keep their profits. To me, regulating banks is not the same as regulating the value of money.
We just blogged about Shock Capitalism, it sounds like Shock Regulation to me.
Posted by: Python | Jan 13, 2008 4:58:16 PM
Winslow R.,
Fine and dandy but instead of evolving you'd destroy decades of case law and/or institutional wisdom. The stability of our society is based on gradual change not revolutionary change.
In practice, of course, no political change can happen quickly under normal circumstances. I don't think "gradualism" is a good reason to push for more gradual change towards something good, since resistance to chance will ensure gradualism anyway.
By a system that has been created/improved/defended by our forefathers and is now ours to evolve further to meet our needs.
I understand this is how it looks. But does the system really meet our needs? Or does it meet the needs of those who run the system? I accept Bryan Caplan's arguments of voter bias (although I place more blame on the system than the voter), as well as Mises's and Hayek's arguments on calculation and knowledge, and I just don't see the system working to meet our needs.
I do feel the need to point out that our current government did arise from revolutionary change, though.
Banks crossed the line and Barney Frank will not be doing his job if he just sits idly by. His job is not to create a model for banks to make profits but rather a framework that defines the societal boundaries within which banks must work in order to keep those profits.
If banks crossed the line, they must have harmed someone? If someone was harmed, a crime was committed. Why is additional regulation needed to punish criminals?
Also, the banks have paid a price. You mention profits, but the fact is the banks have LOST a lot of profit. The people responsible for fraud have almost certainly been fired among the tens of thousands of laid-off mortgage workers. The market has punished them, although I admit it would be nice if the individual fraudsters were punished as well.
Who will punish the Fed for creating the tremendous incentives for banks to lend out all this cash?
Posted by: G | Jan 13, 2008 5:10:41 PM
Wojtek: "The idea of a dictator wouldn't be so bad for the economy if that dictator declared a set of rules (no matter how unjust) and stuck with them for ever."
As long as they're my rules.
I understand your point, and I don't know what if any regulatory change is needed, but this generic argument applies to any and all regulatory change. It's exactly the sort of vague, one-size-fits-all, political argument I expect from someone defending the last set of regulatory tinkering from the next set, while obscuring details of the regulations. After the next round of tinkering, someone else will be using this argument, and people who like the previous tinkering or other tinkering will employ some equally vague, one-size-fits-all argument for change.
No, I want some details. Who are the "middle men" referenced in the last blog entry? Why did they ignore, or conspire with, so much fraud recently? Do they risk anything by it, or do they win regardless of the validity of information they collect? Is this a new development? Does it have anything to do with recent regulatory changes? Do these changes encourage or shield miscommunication of economic signals? Did the brother-in-law of the last banking committee chair get anything out of it?
These are relevant questions, and I expect someone to ask them. That's the regulator's job. Maybe real regulators don't do the job, but that's a separate issue. If they don't, Boudreaux won't stop their tinkering with this blog entry either, but he does provide an intellectual rationale for not asking the questions. Why bother if we won't change anything anyway?
Posted by: Martin Brock | Jan 13, 2008 6:20:54 PM
"If banks crossed the line, they must have harmed someone? If someone was harmed, a crime was committed. Why is additional regulation needed to punish criminals?"
You strike at the heart of the problem. Many are harmed yet no discernable crime was committed. Thus the need for additional regulation and system evolution.
"Also, the banks have paid a price. You mention profits, but the fact is the banks have LOST a lot of profit. The people responsible for fraud have almost certainly been fired among the tens of thousands of laid-off mortgage workers. The market has punished them, although I admit it would be nice if the individual fraudsters were punished as well."
Again you strike at the heart of the problem. Current banking system regulations leave concentrated profits to a few individuals yet distributed punishment for us all.
"Who will punish the Fed for creating the tremendous incentives for banks to lend out all this cash?"
I'd like to see Mr. Frank and our other representatives do a number on them too. Again it is banking regulations that need to be rethought as the Fed is an extension that connects banks to government.
Posted by: Winslow R. | Jan 13, 2008 6:35:41 PM
"Classical liberalism began on "the left", and I think it's high time we started appealing to "the left"."
Martinduck in debate with Sam Grove Jan 13.
I had to being this forward as ithe othe thread is now so old.
Classical Liberalism, dear martinduck, did not begin with the "left" at all. this is another twist of the socialist evangelical.
The classical Liberal does not in anyway believe in state control or state ownership of anything at all. The classical liberal believes, now and always has, in individual liberty, private ownership of property, and noninterference from state. As close an ideology to libertarainism as you can get.
To try and equate "classical liberalism" to socialism is one of your most outrageous distortions yet.
One of the reason, martinduck, you talk yourself in circles is that you are hopelessly ignorant of facts.
Or, like muirduck, perhaps you do know but deliberately distort everything to get that "left" "is good" theme going because that is what a socialist evangelical is taught to do.
Being a classical liberal is a good thing, being a modern "liberal" is not because it is the polar opposite of classical liberalism.
Posted by: vidyohs | Jan 13, 2008 8:28:48 PM
Winslow R.,
You strike at the heart of the problem. Many are harmed yet no discernable crime was committed. Thus the need for additional regulation and system evolution.
System evolution, I agree with. Its doubtless that the idea of rating loans and packaging them into securities was a good idea, and has merit. Many of the related processes, however, obviously proved to be flawed. Since the firms involved in the problem are largely bankrupt, I think its safe to say the system will evolve and this specific problem will not repeat itself.
The problem with regulatory evolution is the ambiguity of results. How do we know if a given regulation was beneficial? How do we know if it was evolution or devolution? In a system of free banking, the issuers of a currency and their member banks would stand to gain from effective regulation (much the same way as ebay gains when it regulates itself in ways which please its customers). In the current system, we are all forced to deal business with the Federal Reserve system. Without choice there is no market, no economic calculation. There is no valuation of one regulatory environment over another like there might be between competing microlending websites.
I agree that regulation is needed for the system to evolve, but if this regulation comes from government, we will have no objective way of determining its benefit. There will not be any tendency towards adoption of the most effective set of regulations, because people will not be able to choose which regulatory systems they prefer. Without this choice, some of the bad actors involved (i.e., the Fed) will not face penalties because people cannot take their business elsewhere.
Again you strike at the heart of the problem. Current banking system regulations leave concentrated profits to a few individuals yet distributed punishment for us all.
Well, I do think the majority of the harm done was not in fact externalized. A great many of the people involved in fraudulent loans have paid for their mistakes. Most of the firms involved went bankrupt. As this is a libertarian blog, you'll probably find people here who dislike how limited liability shields many actors from the consequences (debts) of their actions, and I am one of them.
Posted by: G | Jan 13, 2008 8:54:02 PM
vidyohsduck: "Classical Liberalism, dear martinduck, did not begin with the "left" at all. this is another twist of the socialist evangelical."
I hardly know where to begin, so I'll begin near the beginning. Idealizing the past, I say, "a man had a right to all he could employ his labour upon, so he had no temptation to labour for more than he could make use of. This left no room for controversy about the title, nor for encroachment on the right of others; what portion a man carved to himself, was easily seen; and it was useless, as well as dishonest, to carve himself too much, or take more than he needed."
Title to more resources than one man uses himself by his own labors is dishonest. Taking more than one man needs is also dishonest. Am I on the left or the right?
Posted by: Martin Brock | Jan 14, 2008 11:42:06 AM
"Title to more resources than one man uses himself by his own labors is dishonest. Taking more than one man needs is also dishonest."
That argument would make sense if all men were truly equal in all aspects, and if all were equally devoted to an identical objective. But as neither is true, the argument is merely religious drivel. So, I say Left.
Posted by: Randy | Jan 14, 2008 12:18:26 PM
That's John Locke, so you're one vote for classical liberalism beginning on "the left", unless you now want to redefine "classical liberalism" to describe something than what the early "liberals" said.
"True equality in all aspects" is not his point. Entitlement is his point. You missed the point. Forcible entitlements are the will of armed men, the government. We aren't all equal in the sense of having the same height and weight or the same hair color or the same beauty, physical strength, intellect or education attainment. That's all very clear but not most relevant to the point, because Locke is discussing government.
We don't all have the same arms either. Some of us have longer arms than others, and some of us have nuclear weapons. We live by rules enforced by the arms of a few, because we prefer this life to the struggle against it, unless life gets really, really bad. We'll even march to concentration camps when ordered so, and we'll accept pretty much any division of the spoils ... and call it "fair". History is very clear in this regard.
Posted by: Martin Brock | Jan 14, 2008 1:03:22 PM
And "fairness" is a thoroughly religious notion. The Middle English "feire" denotes a religious observance.
Posted by: Martin Brock | Jan 14, 2008 1:18:27 PM
Martin,
Fairness is not a religious notion to me. It is simply what real live human beings, each acting in accordance with what he or she believes to be in his or her own best interest, agree to.
As for Left and Right, the terms don't mean to me what they mean to most. To me, the Left is a radical religious movement, and the Right is the defender of whatever religious movement that the Left is currently trying to replace with its own. In other words, Left and Right are temporary. The real split to me is between individualists and socialists, and I classify all religions, even the secular ones, as socialist. As for the word Liberal, it has a lot of meanings these days, but to me it has to mean those who support the individualists, because if it is just another term for socialists then it isn't needed. There are lots of terms for those who support socialism in one form or another. Just pick a form and go with that.
Posted by: Randy | Jan 14, 2008 2:18:18 PM
Randy: "Fairness is not a religious notion to me. It is simply what real live human beings, each acting in accordance with what he or she believes to be in his or her own best interest, agree to."
So it's a fairy tale?
I'm all for people being agreeable too, and I love my mom's apple pie, and I do what men with guns tell me, mostly. If that's what "agreement" means, then I'm agreeable.
Randy: "As for Left and Right, the terms don't mean to me what they mean to most. To me, the Left is a radical religious movement, and the Right is the defender of whatever religious movement that the Left is currently trying to replace with its own."
That's not a bad definition, but you're right that it's not common usage.
Randy: "In other words, Left and Right are temporary. The real split to me is between individualists and socialists, and I classify all religions, even the secular ones, as socialist."
You sound like an anarchist here, but we really can't have property and markets without a state. Property is an ideal. It emerges from natural territoriality to some extent, but it's definitely something else. I believe we can have a smaller state. The trouble is: whoever I support for state office, no matter what he calls himself, always really wants a larger state. At the moment, I'm believing that Ron Paul is different. He probably won't be elected, so I'll never know. Next time, I'll believe that someone else is different.
Randy: "There are lots of terms for those who support socialism in one form or another. Just pick a form and go with that."
I'll pick "conservative", because they're the ones on their way out at the moment. It just makes me feel better.
Posted by: Martin Brock | Jan 14, 2008 4:10:41 PM
Agreement is a fairy tale, Martin? Are you saying that you've never reached an agreement? If not, how do you survive?
Posted by: Randy | Jan 14, 2008 4:39:23 PM
The fairy tale is not "agreement". It's "each acting in accordance with what he or she believes to be in his or her own best interest".
Maybe I believe the Prince of Wales shouldn't inherit the Crown. Makes no difference. I might reach an agreement with him about something, but I'm not acting in accordance with what I believe to be in my own best interest. I'm acting in accordance with what a state decrees. Within these limits, I seek my best interests, but that's not always so comforting.
If I march to the concentration camp, I presumably believe that resistance only hastens my death and ends all chance of escape, so I'm acting in my best interests. Small comfort that.
My survival is in the interest of the state, because it wants to tax me, and it wants me to invest in my children so it can tax them too. If I were no use to it, I'd probably be dead ... at least in jail. Not so long ago, I'd just be dead, but I suppose we have some say in how the state governs us.
Am I exaggerating here? Sure. How much? That's debatable.
Posted by: Martin Brock | Jan 14, 2008 7:53:52 PM
Martin,
And you must believe that acting in accordance with what the state decrees is in your best interest or you wouldn't do it.
Basically, your argument boils down to saying that not all the agreements you've entered into have gone as much in your favor as you would like. Hey, join the club.
You were right to say above that "fair" is a religious notion. But agreement is very much grounded in reality, and it is as close as we can get to fair in the real world. So for all intents and purposes, what we agree to is what is fair. Its no fairy tale. Its the common ideas of fairness that are the fairy tale.
Posted by: Randy | Jan 14, 2008 8:17:47 PM
Randy: "And you must believe that acting in accordance with what the state decrees is in your best interest or you wouldn't do it."
Like I said, if I march to the concentration camp, I believe that's in my "best interests", but I can easily imagine a state offering me better options. All's fair, but that ain't saying much, and it's no argument for liberty at all. It's just an argument for whatever any state ever does.
Randy: "Basically, your argument boils down to saying that not all the agreements you've entered into have gone as much in your favor as you would like. Hey, join the club."
No, it doesn't boil down to that at all. If I were the Prince of Wales, the argument would be essentially the same, and I wouldn't have agreed to be the Prince of Wales for that matter.
Randy: "You were right to say above that "fair" is a religious notion. But agreement is very much grounded in reality, and it is as close as we can get to fair in the real world. So for all intents and purposes, what we agree to is what is fair. Its no fairy tale. Its the common ideas of fairness that are the fairy tale."
I have no problem with religion for that matter. We all have our ideals. Agreement is all well and good. I'm for agreement too, and I love my mom's apple pie. Let's all be agreeable. Everyone agrees that agreement is great, and most would like it even better if they were the Prince of Wales.
Since we all agree on this point, maybe we should move on to something else ... or maybe avoiding more disagreeable issues is the point. That's "fairness" too.
Posted by: Martin Brock | Jan 15, 2008 11:24:14 AM
Honestly, Martin, I don't particularly like this argument because I don't like where it leads me. I'd prefer, for example, to sit back and bitch about the government without having to actively rebel against it. But the truth is that if I choose not to actively rebel, and especially if I choose to actively participate in government programs, then I am in a de-facto state of agreement with the government. The argument begins as an argument against those who sign on to a wage agreement and still want to sit back and bitch about the terms, but it applies just as well to the agreements I've entered into that I'm not entirely satisfied with. My choice is to agree .or. disagree. I don't get to agree .and. disagree. The agreement is fair.
Posted by: Randy | Jan 15, 2008 12:30:18 PM
Every agreement is fair, and furthermore, we agree to everything. If I don't agree to be in a concentration camp, I'm free to be shot trying to escape. We agree completely, and how could we not? What's not to like?
I'm not telling you to sit around and worry about your wages all day. That's up to you. I just don't see any use in this "fairness". Since a "fair wage" is any wage that exists, let's just call it "wage" and be done with it.
Posted by: Martin Brock | Jan 15, 2008 3:58:21 PM
True. And likewise, we can call any government that we accept services from simply "government" and be done with it. It does make following this blog kind of pointless, though. Oh well, maybe now I can find something more useful to do with the time...
Posted by: Randy | Jan 15, 2008 4:21:38 PM
I can tell you why I prefer some government services over others, why I prefer some forcible proprieties to others, some tax policies to others, some entitlements to others. I can't simply say that some are "fair" and others aren't, because that's not saying anything.
Posted by: Martin Brock | Jan 15, 2008 5:46:40 PM
True, because government is pretty much an all or nothing deal. It might be nice if it was a la carte - but its not.
Posted by: Randy | Jan 15, 2008 5:53:11 PM
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