Cafe Hayek

On the Sanford Affair

Here's a letter that I sent yesterday to the Boston Globe:

Dear Editor:

Scott Lehigh argues that "infidelities shouldn't end political careers" (June 26) - to which I say: it depends.

A politician who holds himself or herself out as a savior - as such a paragon of virtue that he or she can be trusted with vast swaths of our lives and property - certainly should not be suffered to remain in office once that person is revealed to be simply another ordinary human being, as faulty as the rest of us.

In the case of Gov. Mark Sanford, however, he's that rare politician who does not fancy himself to be more sagacious or virtuous than the rest of us.  While not excusing Mr. Sanford's broken promises to his wife and family - or his use of public funds to finance his trysts - I regret the likely loss to the public of an official who never posed as being worthy to lord it over ordinary human beings.

Sincerely,
Donald J. Boudreaux

Mr. Sanford's use of public funds to pay for his tryst-inspired trips is the far worse offense to the public.  As for the much-commented-upon fact that Mr. Sanford disappeared without letting any other South Carolina officials know of his whereabouts, well, Mr. Sanford understands that states are not really governed by governors -- that if a high-ranking government official is absent, dead, or comatose, the society will still continue along productively.  The idea that the people of South Carolina were in some sort of danger because their governor was AWOL is absurd.

Having said that, I doubt that Mr. Sanford's political philosophy played much of a role in his excuse-making for his secret trips.  Mr. Sanford no doubt had only one thing on his mind and he behaved irresponsibly and immorally -- chiefly to his family.

Cato University

Cato University is always great.  (I've lectured at several of them, and each one has been so enjoyable and informative that my own lectures didn't much detract from the overall experience.)  This year's Cato U., however, is especially timely -- and promises to be especially informative.

Here are the details.

Tea-d Off!

Here's Glenn Reynolds, writing in today's Wall Street Journal, on today's "Tea Parties."  His take on these events is decidedly different -- and far clearer, in my view -- than is Paul Krugman's take.  I sent the letter (below) to the New York Times in response to Krugman's take.

Paul Krugman criticizes the anti-tax tea parties to be held around the country on Wednesday ("Tea Parties Forever," April 13).  But Mr. Krugman's message never rises above tabloid journalism.  Rather than address the issues, he merely rehashes absurdities spewed (mostly years ago) by right-wingers such as Tom DeLay and Karl Rove.  The implication is that, because the likes of Messrs. DeLay and Rove oppose higher taxes, persons who attend these tea parties must be similarly crazy partisans.

But is it really so absurd for ordinary Americans to be furious that Uncle Sam now promises to run up $9.3 trillion in debt during the next decade - an unfathomable sum that will inevitably lead to much higher taxes or higher inflation or both?  Is it small-minded to oppose corporate welfare for automakers, banks, and insurance companies?  Is it lunatic to fear further socialization of medical-care provision?  Do these concerns really signal that those of us who hold them are, as Mr. Krugman alleges, "refusing to grow up"?

One need not agree with the tea-partiers to concede that these worries are ones that reasonable people can, and do, have.

Sincerely,
Donald J. Boudreaux

A Voice Consistently Powerful and Liberal

My friend and Freeman editor, Sheldon Richman, will be a guest on Glenn Beck's CNN program tonight.  Tune in!

Government, the Downturn, and Responsibility

These letters in yesterday's Wall Street Journal are worth reading:

"The Weekend Interview with Nouriel Roubini: 'Nationalize' the Banks" (Feb. 21) once again demonstrates that the credibility of economists is inversely related to their level of celebrity and their proximity to political power. To paraphrase Lord Acton: Celebrity corrupts, and political celebrity corrupts absolutely. Mr. Roubini tells us that markets fail and have failed to clear because of excesses, greed and irrational exuberance.

Amazingly, Mr. Roubini makes no mention whatsoever of the government interventionism that is largely the cause of our current crisis. Was the Federal Reserve's policy of holding interest rates below the real rate of interest and thereby causing a credit bubble and debt-fueled consumption a market failure? Or was the market failure that market participants did not read F.A. Hayek's "Monetary Theory and the Trade Cycle" and divine the peril that was not being signaled through the price mechanism? Or does Mr. Roubini consider it a market failure that lenders were coerced by the government to make mortgage loans that never would have been made based on market-driven underwriting standards? Is the failure of unqualified homebuyers to decline the cheap, no-down-payment loans that lenders were coerced to offer them another market failure? Was it market failure that lenders knew they would never have to suffer the consequences of reckless underwriting when they could dump their rotten portfolio on the taxpayers via the government-backed Fannie Mae and Freddie Mac?

Robert Drane
Lakewood Ranch, Fla.

It is a matter of public record how we reached the point where the idea of nationalizing the banks arose. I doubt even the most cunning and unscrupulous member of Congress foresaw the ultimate prize, when under the guise of minority home ownership, they put us on the path to crisis.

Now picture the likelihood that a Sen. Chris Dodd or a Rep. Barney Frank could pressure loans to be made or withheld, and this without public knowledge of where money is being directed. Political contributions would flow from the chosen back to politicians.

It is not enough to control the federal Treasury. By nationalizing the banks, a huge slush fund, safe from prying eyes will be created. Who needs a dictator when we have the U.S. Congress?

Joel Brandes
Chestertown, Md.

Mr. Roubini totally misses the mark about what Alan Greenspan got wrong. The former Federal Reserve chairman spent a career playing the Wizard of Oz, pulling the levers to set the price of money. As the ultimate master of the universe, free markets were not allowed to set interest rates and properly allocate capital. Far from taking Ayn Rand's view of the world to an extreme, his implementation was just the opposite -- he knew better where to set the price of money. Sadly, now that the wizard has been revealed, we have so many willing to accept his explanation on how free markets let us down. No, Mr. Greenspan, you did.

Dale Meyer
Madison, Wis.

The Camel In the Tent

My latest column in the Pittsburgh Tribune-Review is here; it shows, I suppose, that I'm losing my sunny outlook on the future.

Here are some central paragraphs:

But the most egregious problem with this salary cap, as with all other restrictions and requirements that are attached to bailout funds, is that it sets a frightening precedent. Government is now increasingly in the business of determining salaries and deciding whether firms can have private jets. These matters -- salaries and jets -- are lightning rods for public attention. So they are, ipso facto, lightning rods for politicians' attention.

You can bet your grandchildren's share of the national debt, however, that other corporate matters will become lightning rods of attention -- and, hence, objects of self-righteously imposed government restrictions.

Is Bank of America spending oodles of money on advertising? Horrors! Make it stop. Is General Motors planning to install machinery that will displace some workers? Never! Make it stop. Is Chrysler appointing yet another middle-aged straight white male as its president? Racist homophobic chauvinists! Make them appoint a handicapped lesbian of color.

Whatever the political fear or fad du jour, be sure that it will be revealed in gaudy orders given by Washington to whatever firms feasted on its bailout bounty.

Lose the 'We'

Beware double-counting.

Government Does Not Know Better (Or Even As Well)

Economist Bill Shughart (a former GMU colleague, by the way) has this excellent op-ed in today's Washington Times; it's on the folly of even small-scale government 'industrial policy.'  Here are Bill's concluding paragraphs:

The truth is: It is not government's function to create jobs. Putting people to work is easy, as demonstrated by Franklin D. Roosevelt's Depression-era Works Progress Administration (WPA), more accurately known as "WPA: We Piddle Around." The bigger challenge is to create wealth. Toyota failed to foresee the economic events that caused its expansion plans to unravel.

Keep this in mind when Congress and the White House are selecting economic stimulus projects to fund this year.

If highly successful private firms like Toyota - with their extraordinary market research and years of savvy and experience - sometimes embark on projects that turn sour, how can we expect politicians, most of whom have no such business know-how, to pick winners?

There is a difference, however. Companies usually risk their own money. In Washington, the politicians will be risking ours.

Credit Is Too Tight, Except When It's Too Loose

Below (and here) is a letter that I sent this morning to the Washington Post.  Can anyone tell me why more people don't pick up on this obvious inconsistency?

Treasury Secretary nominee Timothy Geithner sides with those who worry, as you put it, that "Beijing has kept its currency artificially low to keep the prices of its goods cheap and generate trade surpluses. That has led to a global capital imbalance, as American consumers borrowed and spent and China became the United States' largest foreign creditor" ("Geithner Says China Manipulates Its Currency," January 23).  And he threatens to act "aggressively" to stop this alleged wrongdoing.

Overlook the reality that the only way Beijing can push the price of the yuan lower is through inflation or other policies that weaken the Chinese economy.  Instead ask: why should the Obama administration be so upset by Beijing pumping easy credit into markets at a time when this same administration is deeply worried that credit has become too tight?

Sincerely,
Donald J. Boudreaux

The Declaration of Dependence

President Barack Obama's inaugural declaration that "The question we ask today is not whether our government is too big or too small, but whether it works" is further evidence that the wisdom and values that animated America's founding generation are lost - evidence that too few Americans today possess a mature skepticism of power and a love of liberty, and that too many Americans today are subject to adolescent crushes on charismatic charmers.

 

If Thomas Jefferson thought as Mr. Obama does, he would have written in 1776: "We hold this truth to be self-evident, that all men are endowed by their government with the unalienable right to be taxed, subsidized, regulated, lectured, scolded, herded, harassed, and otherwise ruled in whatever ways work."

 

And these soaring words would have been part of a Declaration of Dependence.

Who's the Partisan Hack?

Brad DeLong says that his blog is "Reality-Based."  And, indeed, it often offers sound, reasonable, clear-eyed commentary - stuff that I typically find valuable even when I disagree with it; indeed, chiefly when I disagree with it.

But not always.  This post borders on being scurrilous -- and certainly crosses the border from reality into paranoid fantasy.  DeLong calls a number of economists, including my GMU colleague Richard Wagner, "ethics-free Republican hacks."  The offense that sparks this charge is opposition to government "stimulus" of the economy.

The charge is outrageous, for a number of reasons.

First, opposition to government stimulus of the economy is hardly a Republican matter.  Suppose the stimulus were to work.  Are Republicans less interested in restoring the economy to health than are Democrats?  Of course not.  In fact, if the stereotype of the GOP is accurate - namely, that the GOP is the party of business - it would appear quite unlikely that any "hacks" for this political party would oppose steps to improve the business climate.

Of course it's possible that the economic theories and ideas motivating a GOP opposition to a stimulus package are mistaken - but being a poor economist is not at all to be an "ethics-free Republican hack."

Second, on the economics of the matter, opposing such a stimulus package -- for macroeconomic reasons or for public-choice reasons or for both reasons -- is hardly a sign of economic dementia.  It's possible, again, that the stimulus reflects good economics and that opposition to the stimulus (such as is expressed by my colleague Dick Wagner, by Ed Lopez, and by other economists listed by DeLong) reflects weak economic reasoning.  But to treat Keynesian fiscal stimulus as beyond-question appropriate -- to treat economists who reject Keynesian theory and policy as buffoons -- is simply nonsense.  Or worse: such treatment seems like the actions of a political hack.

To claim that government cannot spend resources that it doesn't first acquire from the private sector is hardly bizarre.  To claim that taking resources from the private sector reduces demands in those industries from which the resources are taken is hardly bizarre.  To claim that any economic activity stimulated by increased government spending is offset by economic activity elsewhere slowed by government's need to get the resources it spends is hardly bizarre. Again, such claims might be mistaken -- but what about such claims is so ludicrous as to advertise persons who make them "ethics-free Republican hacks"?

Nothing that I can see.

Third -- and here I can speak only for the handful of persons on DeLong's list of "ethics-free Republican hacks" whom I know personally (such as Dick Wagner and Ed Lopez): many of these scholars would be loathe to identify themselves as Republican.  Dick Wagner is one of the least politically partisan people I know.  He has nary a kind word for any politician, Democrat or Republican.  The idea that Dick Wagner is somehow buttering his biscuits by insincerely writing things that the GOP wants to read, or that he thinks the GOP wants to read, is crazy beyond description.

Fourth, again supposing that fiscal stimulus by government will work and that the economists on DeLong's doo-doo list actually agree (for these suppositions are part of DeLong's premises), it's more likely that such opposition reflects an abundance of ethics rather than an absence of ethics.

It's no ethical challenge to support something that works.  It is, however, a real ethical challenge to oppose something that you believe would work.  Someone opposed as a matter of principle to government intervention into the economy might be sensible or not; but if that person sticks by his or her principles -- if he or she continues to oppose the intervention on moral grounds, or because of a belief that following what is thought to be a wise rule-of-thumb is best even at the cost of making things worse in the immediate case -- that person is ethics-infused, not ethics-free.

Once again, the economics underlying such principles might be mistaken, or the ethics motivating such opposition might be disagreeable, but the persons standing up for what they believe in are quite the opposite of "ethics-free."

I myself am quite skeptical -- for reasons expressed beautifully by Dick Wagner in the quotation that DeLong features -- of the success of any "stimulus" plan.  But even if I were convinced that such stimulus in this case would restore economic health much sooner than it would otherwise be restored, I would still oppose it -- on ethical grounds.

Too Big to Fail?

In this op-ed in today's Wall Street Journal, I argue against the bailout of GM, Ford, and Chrysler.  Here are some key paragraphs:

Bankruptcy doesn't make assets -- such as factories, machines, contractual options to buy raw materials, workers' skills -- disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout's cheerleaders.

But what if refusal to bail out these firms results in their complete failure? Even then -- especially then -- the case for a bailout crashes. Really big firms such as GM, Ford and Chrysler are really big users of productive inputs, like rubber and steel. Almost all of these inputs have alternative uses and could be used by other firms or in other industries.

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can't use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.

Frankly Ironic

On a day when the top news story is a politician's attempted sale of a U.S. Senate seat, Thomas Frank, in his weekly column in the Wall Street Journal, takes aim at surrogate-mother contracts.

What irony!  A high-ranking member of the class of people that Mr. Frank believes must protect us from greed - politicians - tries to sell what doesn't belong to him, while Mr. Frank gets all hot'n'bothered by market transactions in which each person sells only what does belong to her.

The Stakes

The only stake here should be through the heart of any bailout proposal.

Gay Marriage

Here's a letter of mine that appears in today's Washington Times:

Thomas Sowell's case against affirmative action is sound; his case against same-sex marriage is not ("Affirmative action and gay marriage are frauds," Commentary, Sunday).

It's true that marriage laws emerged largely to deal with fact that heterosexual couples have children. But this fact does not imply - contrary to Mr. Sowell's careless claim - that "the government has a vested interest in unions that, among other things, have the potential to produce children, which is to say, the future population of the nation." Certainly in a free country, the state has no business governing in any way or for any purpose people's decisions on having children.

Additionally, the "married couple" has become a legal entity with unique status under tax, property, insurance and estate laws. Being married also carries with it important, largely positive, social implications. The fact that gay couples cannot (by conventional means) have children is no reason to deny these couples such status.

DONALD J. BOUDREAUX
Chairman
Department of Economics
George Mason University
Fairfax

Greenspan Is Guilty As Charged

One of our generation's finest monetary theorists and historians, George Selgin, argues here against David Henderson's and Jeffrey Hummel's recent attempt to acquit Alan Greenspan's monetary policy from contributing to the now-burst housing bubble.

George's case is powerful and well-argued.  I believe that he's correct.

Two Can Play This Game

There's been a rush to blame free markets, even laissez faire libertarianism, for the current financial crisis.  As I -- and Russ -- have said before, there are lots of other potential culprits around.  Hastily concluding that the culprit is the free market might be emotionally gratifying for many folks, but it's an intellectually corrupt conclusion.

Research perhaps will eventually reveal that free markets and deregulation are the main culprits.  Or research perhaps will eventually clear these suspects of most or all such charges.  Time will tell.

In the meantime, anyone wishing to play the childish game of accusing free markets of the financial turmoil should expect something like the following from opponents playing by the same rules:

We now have proof that government is a god that failed -- a poverty-inducing and economically destructive institution that humankind should finally learn must be kept on an extraordinarily tight leash, lest it wreak havoc in the lives and on the fortunes of innocent parties.

The facts are crystal clear.  Since the March 24 promise by the Fed to guarantee $29 billion worth of mortgage securities held by Bear, Stearns, the Dow has fallen 34 percent (as of mid-day on October 28, 2008).  Since the September 8th announcement by the U.S. Treasury Department that it will take over Fannie Mae and Freddie Mac, the Dow has shed 28 percent.  Since the October 3 enactment of Uncle Sam's massive bailout bill, the Dow is down 20 percent.
.....
My priors tell me that all this government intervention is indeed playing a big role in Wall Street's continuing woes.  But at this point, that's all I've really got: priors.

If, though, someone wishes to assert "No!  The problem is caused by deregulation!" then I accuse that person of having only priors -- priors no better or more trustworthy than my own.  And if that person wants to get into a game of post hoc, ergo propter hoc 'theorizing,' then I see no reason why the particular post hoc argument stated in italics above is less compelling than the particular post hoc arguments paraded about now so confidently by the anti-market crowd.

Arnold the Wise

Arnold Kling at his best.

Bush, McCain, Obama, Volcker, Ears, and Surprises

Andy Morriss -- University of Illinois law prof, and my co-blogger at Market Correction -- sent the following letters yesterday.  The first is to the Wall Street Journal; the second is to the Financial Times:

Sirs,

Rather than being reassured that Paul Volcker is “whispering in Obama’s ear,” (“Volcker Makes a Comeback as Part of Obama Brain Trust,” Oct. 21) I find it frightening that financial markets believe that any person, whether it be Sen. Obama or Sen. McCain, is going to have such power over private individuals that we need to worry about who whispers in their ears. I’d be much happier if the only people whispering in Sen. Obama’s ears were his wife and daughters.

//////

Sirs,

You report that Pres. George W. Bush is “open to the idea” of yet another spending package as if it were a surprise (“Fed chief backs new stimulus before year’s end,” Oct. 21). Pres. Bush’s consistent failure to veto the enormous number of spending bills both Republican and Democrat-controlled Congresses have sent him merely confirms that, like all politicians,  even America’s nominally “conservative” ones are always willing to spend other people’s money.  I predict that you’ll be reporting a year from now that our next president is considering yet another spending spree, no matter who wins the upcoming election.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
University of Illinois

Contributing to Regime Uncertainty

Here's the always-excellent George Selgin on central banking and the bailout.

David Henderson on Today's Economy

Here's economist David Henderson -- editor of the splendid Concise Encyclopedia of Economics -- on the current financial turmoil.  A sample paragraph:

The best evidence is that the problem was triggered by previous government regulation combined with an unrealistic belief on the part of many people that housing prices could only go up. It is important to understand the cause because, if we do not, we are unlikely to choose good solutions. Indeed, the US federal government has, for the last few months, chosen one bad solution after another.

Austrian Capital Theory in Action

Mario Rizzo, one of my former professors at NYU, sent this excellent letter recently to the New York Times:

To the editor:

As much as I admire Casey Mulligan's work in general and agree with him on many things, I am quite taken aback by his piece "An Economy You Can Bank On" of October 9th.

First, the idea of an aggregate "marginal product of capital" is an example of a concept in search of a real-world counterpart. If it were to mean anything useful it would have to be some kind of coherent sum of the productiveness of the capital of individual firms. Decades of discussion among economists failed to produce any way to do this consistent with the facts of reality.

Second, society does not have a capital stock as if it were lump of some homogeneous substance. Capital is a structure of various goods used in specific combinations to produce other goods. Today the capital structure is discoordinated. Too many resources have gone into housing, for example. An aggregate measure that ignores this cannot convey an adequate picture of the real economy.

Third, Professor Mulligan has come dangerously close to saying that money, or perhaps credit, is simply a veil. He says if there are potential borrowers and potential lenders out there, they will find some way to get together. As both J. M. Keynes and F. A. Hayek argued, money is not neutral. It has real effects. It guides production and consumption decisions. We live in a monetary economy that depends on signals from interest rates, financial asset prices, among others.

I wish Professor Mulligan were right, I would sleep better; but he isn't.

Sincerely,
Mario Rizzo
NEW YORK UNIVERSITY
Department of Economics

Hayek's Revenge

University of Illinois law professor -- and Ideoblog's -- Larry Ribstein calls it "Hayek's Revenge."

Morriss on Brown

My friend and co-blogger at Market Correction, Andy Morriss, sent this letter to the Financial Times:

Sirs,

You write that the European response “once again” to the banking crisis demonstrated that “it often takes a full-blown crisis to bring the best out” of the European Union (“Turmoil brings out best in Europe,” Oct. 14). Historian Robert Higgs offered a more ominous account of the impact of a crisis on government, noting that the increases in state power that form the response to a crisis never fully recede once the crisis is over (Robert Higgs, Crisis and Leviathan).  If Higgs is right, Gordon Brown’s leadership role is not ironic, as your story suggests, but entirely predictable: Europe’s most statist leader seized a chance to boost state power. This is no more surprising than that a hog would gorge itself when presented with a trough of food and about as appetizing to watch.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
University of Illinois

Covering All Possibilities, From A to B

Here's a letter that I just sent to the Washington Post:

Dear Editor:

You ask "How did world markets come to the brink of collapse?" ("Washington Failed to Catch Up to Wall Street," October 15).  You answer: "Some say regulators failed.  Others claim deregulation left them handcuffed." You wonder: "Who's right?" Perhaps the answer is 'none of the above.'

Contrary to your pose of presenting all relevant possibilities, you miss the main debate entirely. The chief question is to what extent are today's problems caused by market forces, and to what extent by government interference with these forces.  You, though, take the necessity of regulators for granted and ask only why they failed.

If you ran a similar report on the cause of lousy meals served at restaurants whose kitchens are crammed with regulators, you would likely open it with: "Some say regulators failed.  Others claim they were handcuffed. Who's right?"  Perhaps the answer is 'none of the above.'  Maybe, just maybe, the meals will improve only if the regulators clear out of the restaurants altogether and let the chefs and their customers do their thing, unmolested and unsubsidized.

Sincerely,
Donald J. Boudreaux

The "Mysterious" Great Depression?

This insightful op-ed by West Virginia University banking theorist and historian George Selgin (dispensing the myth of the alleged 'mysteries' of the Great Depression), although written more than a year ago, is especially relevant today.  Here's a key paragraph:

Paradoxically, perhaps, the fact that orthodox economics has a good deal to say about how the Great Depression happened itself suggests that there is after all something puzzling about the Great Depression. What's puzzling is not that the depression happened, given policies that were resorted to, but that such destructive policies secured wide support despite their often readily-predictable, adverse consequences. But to call even such perversity a "mystery" is to be guilty of hyperbole. After all, politicians are rewarded for appearing to "do something," and not for their command of "abstract" theories.

Jon Macey on Uncle Sam's Interventions

Yale Law School's Jonathan Macey explains clearly, in today's Wall Street Journal, that George Bush's, Congress's, and the SEC's recent interventions into today's panicky market are making this panic not only more intense but justified.  Here's an important passage:

Of course, market manipulation does exist, but federal regulators deserve much of the blame for this form of market abuse. For years the SEC has hampered companies' ability to protect themselves from manipulation by short-sellers. The most effective way for a company to respond to an attempt to manipulate its share prices is simply to repurchase its own shares, simultaneously "squeezing" the short positions and sending a clear signal of financial health to the capital market.

However, companies have long felt vulnerable to being charged by the SEC with manipulation whenever they go into the market to make share repurchases. The SEC finally acknowledged this problem after the collapse of Bear Stearns and Lehman when it stated publicly that "historically, issuers generally have been reluctant to undertake repurchases" when faced with manipulative short-sellers because of the massive amount of uncertainty about whether the SEC would sue them for trying to manipulate the market.

Walter Williams's Lessons From the Bailout

My and Russ's colleague Walter Williams draws important lessons from the bailout.

$700 Billion Bad Bet

Paul Jacob speaks common sense about the "$700 Billion Bad Bet."  He's not banking on it.

And Even More on the Bailout

HT to Steve Landsburg.

Fat Chance

Here's a letter that I just sent to the CBS Radio Network:

On your 9am (EDT) national news broadcast today you reported (1) that, across the U.S., families now face more difficulty feeding "hungry mouths," and (2) that, because of today's financial worries, many ordinary Americans "are overeating."

Are you not struck by this inconsistency?

Sincerely,
Donald J. Boudreaux

Higgs on the Bailout

Here's Bob Higgs on the bailout 'plan.'  I especially like this paragraph:

Sure enough, in the days after the bill’s initial defeat, its managers took the monstrosity that had failed on Monday and made it even uglier. Their purpose, of course, was to buy off the bill’s opponents in Congress by sweetening it with all sorts of more or less unrelated provisions intended to channel benefits to the opponents’ constituents and supporters. In short, in Washington last week, business went on as usual: Congress is the name; corruption is the game.

Yes.  Thank goodness we Americans have mature, responsible, wise, and courageous 'leaders' in government to regulate markets.

Children can be excused for believing in Santa Claus; they are, after all, children.  Adults cannot be excused for believing in the beneficence and wisdom of the state.  This institution's foolishness and predations are visible for all who care to see.  I can respect at least the intelligence of those who defend the state as their means of extracting wealth from others -- that is, for example, I can respect the intelligence of U.S. auto executives who defend the state as their means of extracting the $25 billion recently ponied up by Uncle Sam to help G.M., Ford, and Chrysler.  I can respect their intelligence even as I loathe their ethics.

But I cannot respect the intelligence of adults who continue to insist that empowering strangers sitting beneath a marble dome to take and spend other people's money is wise and sensible.  And my respect for such alleged 'intelligence' dissolves even further when I reflect upon the fact that those persons who insist on trusting the state (because its top officials are elected democratically) see -- or should see -- the disgraceful behavior that these officials each engage in to win their gaudy glory.

Klinging to Sanity, With Spirit!

I love it when Arnold Kling gets angry.

And I wish that he were asked to testify before the self-important, officious, duplicitous, and shameless pooh-bahs on Capitol Hill.

Stan Liebowitz on the Mortgage Meltdown

Stan Liebowitz concludes that the chief culprit in today's mortgage-market meltdown is government.  Here's a key paragraph from the Executive Summary:

This report concludes that, in an attempt to increase home ownership, particularly by minorities and the less affluent, virtually every branch of the government undertook an attack on underwriting standards starting in the early 1990s. Regulators, academic specialists, GSEs, and housing activists universally praised the decline in mortgage-underwriting standards as an “innovation” in mortgage lending. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble. The price bubble, along with relaxed lending standards, allowed speculators to purchase homes without putting their own money at risk.

Regime Uncertainty

What I find most scary about the current market turmoil are the shenanigans it fuels on Capitol Hill and its immediate environs.

Uncle Sam is, I worry, on the verge of creating the same kind of "regime uncertainty" that Bob HIggs effectively argues deepened and prolonged the Great Depression.

More Lazy Fare

Here's a letter that I sent last week to the Baltimore Sun:

Rena Steinzor blames today's financial unrest on "knee-jerk opposition to federal regulation" ("Reviving regulation," Sept. 28”).  Her solution, of course, is greater government involvement in the economy.

But on the very same op-ed page, Cynthia Tucker put part of the blame (rightly so) on George W. Bush: "The White House bragged on programs to make borrowing easy, including an initiative to allow the Federal Housing Administration to insure mortgages for first-time homebuyers without a down payment" ("Minorities a convenient scapegoat for U.S. financial woes").

Clearly, the only knees jerking of late are not those of conservative politicians opposing government intrusion into markets but, rather, of persons such as Prof. Steinzor who lazily assume that laissez faire has been the order of the day.

Sincerely,
Donald J. Boudreaux
George Mason University

Laissez Faire to Blame?

With his column in Wednesday's Washington Post, Harold Meyerson joined the chorus of pundits chanting that the turmoil in credit markets signals "the collapse of laissez faire."

Webster's Revised Unabridged Dictionary defines "laissez faire" as

Noninterference; -- an axiom of some political economists, deprecating interference of government by attempts to foster or regulate commerce, manufactures, etc., by bounty or by restriction.

No one who examines the American economy in general, or credit markets in particular, can truthfully conclude that laissez faire has reigned in recent years.  Indeed, were Mr. Meyerson to read George Will's column appearing beside his own in that same edition of the Post, he'd get a partial list of the many government interventions that have paved the path to this crisis.

To blame laissez faire for today's economic crisis is akin to blaming the human body's natural and normal functioning for the illness suffered by someone who's overdosing on heroin.

Frozen Conventional Wisdom

This report in today's Christian Science Monitor is typical of many such reports of late in taking George W. Bush at his word that credit markets are "frozen" and that, without a bailout, the economy will tumble into the abyss.

But read this report carefully and it's difficult to find evidence in it of any such freezing.  Credit markets have tightened, to be sure, but they emphatically are not frozen.

Here are some of my favorite selections from this report:

Not everyone has felt the squeeze yet. Home buyers with good credit can still get mortgages, although it may require more footwork. The interest-rate gap between commercial bank lending and Treasury bills has eased from record levels a few days ago.

(Note the "yet."  Why presume that people with good credit will eventually be unable to get mortgages and other lines of market-justified credit?)

And

Nationally, only 63 percent of consumers applying for a car loan are being approved compared with 83 percent a year ago, says Art Spinella, president of CNW Marketing Research in Bandon, Ore.

"Only 63 percent...."  This doesn't seem to me to be anything remotely close to evidence that ordinary Americans are being "frozen" out of access to credit.

And today Toyota announced zero-percent financing on 11 of its models.

Let's Bail on the Bailout

My friend and co-blogger at Market Correction, Andy Morriss, sent this letter to the Financial Times:

Sirs,

Your editorial on the failed bailout vote in the US House of Representatives claims the bill “could be part of an effective answer” to the financial crisis. Perhaps in the sense that as a 48 year old, out of shape university professor, I “could be” an astronaut. The bailout bill has grown from three pages in Sec. Paulson’s initial “give me $700 billion and I’ll fix it” proposal to the size of a hefty paperback novel. As of Thursday morning the Senate version was 450 pages long.  My chances of a moon walk greatly exceed the chance that this bill will be anything other than a massive resource grab -- those extra 447 pages aren’t value added, they’re favors for special interests, like the attempt by Senate Democrats to shovel millions to the radical group ACORN, or total irrelevancies hitching a ride on the crisis atmosphere, like the provision requiring insurance companies provide more money for mental health treatment.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
University of Illinois

Still Hoping Against A Bailout

Here's a letter that I sent yesterday to the New York Times:

Deeply upset that the House of Represetatives voted against the bailout plan, David Brooks writes that "We're living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial" ("Revolt of the Nihilists," September 30).

So, pray tell, how will a massive government bailout of persons who behaved imprudently - a bailout inevitably injecting hundreds of billions of dollars of additional paper capital into the economy - solve the underlying problem?

As my colleague Richard Wagner points out, markets aren't intoxicated by large flows of capital per se.  Such bubblicious drunkenness results from capital that is politically supplied and directed - just the sort of capital promised by the bailout plan.

Sincerely,
Donald J. Boudreaux

Sensible Voices Against the Bailout

Dan Mitchell wisely and eloquently opposes a bailout.  So, too, does Jeffrey Miron.

Likewise, David Harsanyi speaks good sense on this topic (save for his criticism of the repeal of the Glass-Steagall Act).

And Arnold Kling, of course, is another voice of reason.

On Frozen Credit Markets

I can't count the number of times I've heard in the past few days that credit markets are now frozen in America.  Such a 'freeze' allegedly is a main reason justifying Uncle Sam's longed-for bailout of Wall Street.

Well, some tropical sun must be hitting at least a small part of the credit market, for yesterday's mail brought to my son, Thomas, an offer of a credit card from American Express.

Thomas is eleven.  And while his credit is pretty good with his mother and me, I'm very impressed that he's managed to establish his credit creds so firmly with a company that, if there's truth in today's told tale, has scant amounts money to lend.

In looking over this offer of credit to my pre-pubescent son, I see that Thomas Macaulay Boudreaux's qualifications for this generous offer seem to be the fact that he has a mailing address and a frequent-flyer number with a major airline.

Geez, I can only imagine what sorts of offers of credit will flood in to Thomas if and when Uncle Sam thoroughly thaws the credit markets with a bailout.

Should Government Make Health-Care As 'Affordable' As It's Made Housing?

My friend Nick Calapa sent me the following e-mail:

The one good thing that came out of this whole credit debacle, I now have the perfect pithy response to all the lefties who tell me that the government should take over health care and make it affordable to everyone.  You mean the way they made home ownership affordable to all through Fannie and Freddie?  How did that work out for you?

Go Nick!!

Thomas Sowell on the Bailout

Thomas Sowell's latest is spot-on.

Here's an excerpt:

N. Gregory Mankiw, his {Pres. George W. Bush's] Chairman of the Council of Economic Advisers, warned in February 2004 that expecting a government bailout if things go wrong "creates an incentive for a company to take on risk and enjoy the associated increase in return."

Since risky investments usually pay more than safer investments, the incentive is for a government-supported enterprise to take bigger risks, since they get more profit if the risks pay off and the taxpayers get stuck with the losses if not.

The government does not guarantee Fannie Mae or Freddie Mac, but the widespread assumption has been that the government would step in with a bailout to prevent chaos in financial markets.

Alan Greenspan, then head of the Federal Reserve System, made the same point in testifying before Congress in February 2004. He said: "The Federal Reserve is concerned" that Fannie Mae and Freddie Mac were using this implicit reliance on a government bailout in a crisis to take more risks, in order to "multiply the profitability of subsidized debt."

(HT Walter Williams)

No Bailout

My friend Bob Gelfond has this nice lead letter in today's Wall Street Journal:

I'm dismayed to see the Journal's editorial page give up its strong free-market principles in supporting the Paulson Plan with some minor tweaks ("The Paulson Sale," Sept 24). You have led the way in exposing government actions through regulation and support of government-sponsored enterprises as being the major contributors to the current crisis. Yet how is it that when the crisis deepens, the solution is for more government?

The lesson of past financial inflection points is that we must let the markets reallocate capital from less efficient to more efficient uses. The sad fact is that we need to go through a brutal process of resizing down our financial and real-estate industries. Actions to try to recapitalize doomed financial companies only postpone the day of reckoning, which will make matters worse as the Japanese learned in the 1990s.

Bob Gelfond
New York

Indeed so.

"Lack of credit history should not be seen as a negative factor" Once Said the Boston Fed

Jeff Jacoby writes great good sense in today's Boston Globe.

Lazy Fare

Here's a letter that I sent this morning to the Wall Street Journal:

Calling for "new New Deal" ("America Needs a New New Deal," Sept. 27) Katrina Vanden Heuvel and Eric Schlosser offer a potted history of the old one and the problems that it allegedly solved.  For example, the bank failures that prompted the 1933 Emergency Banking Act were emphatically not the result of laissez faire policies.  Rather, they were caused by the Fed's disastrous contraction of the money supply and by government restrictions on branch banking - restrictions that prevented banks from sufficiently diversifying their portfolios.

Ms. Vanden Heuvel and Mr. Schlosser contradict not only history, but also themselves.  After asserting that the Great Depression was "preceded by years of laissez-faire economic policies," they write, a mere two paragraphs later, that "direct government intervention has played a central role throughout American economic history."

Such poor history and lousy logic ought not be taken seriously.

Sincerely,
Donald J. Boudreaux

Slipping Down the Slope

Ilya Somin, my colleague over at GMU Law, rightly worries about the slippery slope that the bailout plan is likely to perch us upon.

Today's column by the Washington Post's David Ignatius provides further evidence that this slope is both steep and slippery.  Mind - Ignatius himself isn't worried about slipping too far down a dangerous slope; rather, his proposal is evidence of how easy, in fact, it is to slip:

A truly Keynesian rescue plan should do more than bail out foolish investors. How might the pieces fit into a larger design? Well, if the taxpayers are going to acquire a stake in the nation's largest insurance company, perhaps that company can be the cornerstone of a new system of universal private health coverage. If the taxpayers are going to acquire $700 billion in real estate assets, perhaps the eventual profits can fund new investments in infrastructure or energy technology.

Bob Higgs on Current Credit-Market Activity

And this from a man who is a congenital pessimist!

Genetically Engineered Chickens Coming Home to Roost

In today's Wall Street Journal, Columbia University economist Charles Calomiris (one of the most respected money and banking economists of our era) co-authored this essay with Peter Wallison that argues that Congress pushed Fannie and Freddie to make high-risk mortgage loans.  Here are a few passages from the article:

The strategy of presenting themselves to Congress as the champions of affordable housing appears to have worked. Fannie and Freddie retained the support of many in Congress, particularly Democrats, and they were allowed to continue unrestrained. Rep. Barney Frank (D., Mass), for example, now the chair of the House Financial Services Committee, openly described the "arrangement" with the GSEs at a committee hearing on GSE reform in 2003: "Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing." The hint to Fannie and Freddie was obvious: Concentrate on affordable housing and, despite your problems, your congressional support is secure.

......

In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.

Now the Democrats are blaming the financial crisis on "deregulation." This is a canard. There has indeed been deregulation in our economy -- in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few -- and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm.

As a result, U.S. commercial banks have been able to attract more than $100 billion of new capital in the past year to replace most of their subprime-related write-downs. Deregulation of branching restrictions and limitations on bank product offerings also made possible bank acquisition of Bear Stearns and Merrill Lynch, saving billions in likely resolution costs for taxpayers.

If the Democrats had let the 2005 legislation come to a vote, the huge growth in the subprime and Alt-A loan portfolios of Fannie and Freddie could not have occurred, and the scale of the financial meltdown would have been substantially less. The same politicians who today decry the lack of intervention to stop excess risk taking in 2005-2006 were the ones who blocked the only legislative effort that could have stopped it.