Cafe Hayek

Treason Against Reason

John Stossel challenges Paul Krugman's over-the-top assertion that oppostion to climate-change legislation is "treason against the planet.

I also challenge Krugman in a different, but complementary, way.

The Dangers of Regulating Exectutive Pay

Yesterday's edition of the Washington Examiner ran (after severely editing) this op-ed on regulating executive pay that I wrote for the Virginia Institute.

The car market

There have been a few regulations over time. The interesting question is why the foreign car makers were able to make small cars that people wanted to buy in the 1970s and 1980s that complied with these regulations while American car manufacturers did not.

Class Credit

Is the hot-off-the-press Credit Card Accountability, Responsibility and Disclosure Act "likely to bring about moderate, and even positive, changes" -- as Ryan Bubb and Alex Kaufman argue in today's New York Times?  I'm skeptical.

Bubb and Kaufman -- economics doctoral candidates at Harvard -- argue that the terms that have been offered for years by credit unions that issue credit cards have long met the terms demanded by this new piece of federal legislation.  So because credit unions have obviously been able to earn sufficient profit over the years by issuing credit cards with terms similar to those now demanded by Uncle Sam, investor-owned banks that issue credit cards will similarly be able to earn sufficient profit.

If Bubb and Kaufman are correct, it follows that few, if any, deserving consumers will suffer any increased difficulties in getting credit.

But Bubb and Kaufman (rather mysteriously, in my view) go on to say the following:

Credit union cards are a great test case for how regular cards will perform under the new law. The evidence so far suggests that the credit card act is likely to bring about moderate, and even positive, changes. Card issuers, after all, need to retain customers. Any bank that attempts to pad its bottom line by, say, levying large annual fees will likely see its customers flee to credit unions or to banks that emulate the credit union model.

The last two sentences quoted above make good sense.  They raise the question, though: why didn't we see any such flight or emulation in the past?  Were consumers dumb or careless before the enactment of the new legislation and somehow now are smart and responsive?

I haven't read the research that Bubb and Kaufman mention in their op-ed, but I wonder if they controlled for the possibility that the class of credit-card customers most profitably served by banks differs from the class of credit-card customers most profitably served by credit unions.  If the customers of one type of institution differ significantly (in their credit histories, income profiles, rate of card usage, etc.) from the customers served by the other type of institution, then credit terms profitably offered by one type of institution are not necessarily profitable for the other type of institution.

Given Bubb's and Kaufman's explicit understanding that competition is at work in the credit-card-issuing industry, it's not clear to me why they are confident that new restrictions imposed by Uncle Sam will have no deliterious effects upon consumers.

Unintendend Consequences

Division of Labour's Art Carden hits a home-run with this letter in today's Wall Street Journal:

The problems identified in the article about organized gangs smuggling undocumented immigrants across the U.S. border and then holding them for ransom ("Immigrants Become Hostages as Gangs Prey on Mexicans," page one, June 10) were created by a perfect storm of government intervention. The drug war has encouraged the development of international criminal syndicates and turned parts of the U.S.-Mexico border into actual war zones.

The war on undocumented immigrants has created opportunities for those syndicates to enter into the human-trafficking business. Cheap money and government policies aimed at increasing access to "affordable housing" created the housing bubble, and further intervention in the last year prevented housing prices from falling far enough to clear the market. This effectively created the "drop houses" in which criminal gangs abuse immigrants who have no legal recourse against them.

I expect that politicians will demand ramped-up enforcement, but this will be a mistake. The best way to proceed would be to end the war on drugs, end the war on immigrants, and scale back intervention in the housing market.

Art Carden
Memphis, Tenn.

Unfairness -- and Anti-Freedom -- Doctrine

Here's a letter that I sent recently to the Los Angeles Times:

Seth Hill writes that "Every time I'm surfing channels and I happen by mistake to land there [on the Fox News channel], I have to watch a commentary by [Newt] Gingrich or former Vice President Dick Cheney.  That channel makes me long for the days of the Fairness Doctrine" (Letters, June 19).

Mr. Hill's attitude is the seed of totalitarianism: unable to distinguish what he does voluntarily from what he is coerced into doing, he wants to use force to save himself from the annoyance of fleetingly encountering disagreeable ideas as he flips his channel changer - and to use force to hamper other persons' access to those ideas.

There's nothing fair about that.
 
Sincerely,
Donald J. Boudreaux

Writing in the January 1997 issue of the Journal of Legal Studies, my GMU colleague Tom Hazlett and co-author David Sosa found that the Fairness Doctrine chilled public discourse.

Beware Hidden Taxes

Writing in today's Boston Globe, former OIRA chief Susan Dudley (along with Jeff Rosen) warns -- very sensibly -- that we should beware of hidden taxes.

Details on the Costs of Regulation

"Crushing, Hidden Tax of Federal Regulation Soars" -- as reported by CEI's Wayne Crews in his annual report on this topic.

Moe, Larry, and Curly?

The New York Times reports under this photo:

Representative Barney Frank, and Senators Charles E. Schumer and Christopher J. Dodd would play critical roles guiding the administration’s financial overhaul through Congress.

They have played a major role in past financial regulation and in blocking regulation that helped create the crisis.

Are they stooges? I report, you decide:

Frank has a Fannie Mae problem.
Dodd has an AiG problem. And a Fannie Mae problem.
And Schumer co-sponsored the bill that caused the financial crisis (according to Paul Krugman.)

A Tax By Any Other Name....

Wayne Crews and Ryan Young, with the Competitive Enterprise Institute, explain that regulation is a form of taxation.  Here are the opening paragraphs:

We need a breather to take it all in: TARP, a $787 billion stimulus bill and a projected $1.845 trillion budget deficit. But lost among all the spending commotion is yet another trillion-dollar poker hand — federal regulation.

Compliance costs from thousands of regulations — pouring out from over 60 departments, agencies and commissions — amounted to $1.17 trillion in 2008. The federal government spends an additional $49.1 billion just to administer and enforce its rules. This figure is on par with federal income tax revenue ($1.2 trillion) and Canada's entire 2006 GDP ($1.265 trillion).

(By the way, I'm proud to say that Wayne and Ryan each earned his Master's degrees at GMU Economics.)

Antiantitrust

Here (HT: George) is the audio of my conversation with Harold Meyerson on today's Kojo Nnamdi show. We talk about antitrust. I am antiantitrust.

How the world really works

Is it a good idea to have medical records stored in electronic form rather than paper? Maybe. One argument is that if there are stored electronically, it will help us find the "best" treatments because we will have all kinds of data. This optimism may be warranted. Against it, is the consideration that "best" is often unclear, depends on the individual, depends on the cost, and is subject to political manipulation if the determination of the "best" treatment is a government decision.

Another argument often advanced for electronic records is cost-saving. It will prevent needless duplication. But of course mobilizing the medical profession to do something they don't seem to think worthwhile doing on their own will have its own costs as well.

This article in the Washington Post deserves to be read in its entirety. It explores how implementing electronic records became part of the stimulus bill. Not because it's a great idea but because the people who would profit from it lobbied like crazy. It may be a great idea. Suffice it to say that the evidence is highly biased.

At the center of this picture is the proposed savings in costs of $77 billion.  But as the Post reports:

The stimulus bill suggests that the government will recoup about a third of the spending allocated for electronic health records over the next decade, an assumption that some health-care observers question, in part because of a critical analysis by the Congressional Budget Office last year.

The CBO, then led by Orszag, examined the industry-funded study behind the $77.8 billion assertion, among other things, and concluded that it relied on "overly optimistic" assumptions and said much is unknown about the potential impact of health information technology.

A CBO analysis of the stimulus bill this year projected that spending on electronic health records could yield perhaps $17 billion in savings over a decade.

This is how the world really works. When Obama says that electronic record-keeping is a crucial way to control costs, it seems like a really cool idea. It may be. But I doubt it. And the real reason we're going this route isn't because a wise President sees a cost-saving opportunity. It's a lot uglier than that.

As for this being part of the stimulus plan, what a joke. The main thing that will be stimulated are the bank accounts of the people who make the products that help computerize the records.

Verite from Veronique

Another Opportunity for 'Progressives' to Put Their Money Where Their Mouths Are

Roger Meiners has this great letter in today's Wall Street Journal:

Payday Loan Bill Cuts Choices for Poor

Michael Calhoun, the head of the Center for Responsible Lending, asserts (Letters, April 18) that payday loans should be capped at 36% APR and endorses H.R. 1214, The Payday Loan Reform Act of 2009, for imposing limits.

At that rate, a loan of $200 for one month would generate $6 in interest. If Mr. Calhoun and the bill's sponsors really think one can run a payday business by charging such a rate, they should set up shop. It is not hard to do. Clients will flock to their outlets instead of the "predatory" lenders they criticize.

The payday loan market is highly competitive and provides a needed service primarily for low-income people. Just let those folks try getting an instant loan from Citibank for $200 for one month. If H.R. 1214 is enacted, it will be back to thugs serving the low-income borrower market. That's a "reform"?

Prof. Roger Meiners
University of Texas-Arlington
Arlington, Texas

Denying Credit Where It Isn't Due

TO: Anyone who endorses government restrictions on the terms on which credit-card customers can contract with credit-card issuers

FROM: An economist

Trusting that you have the best interests of consumers in mind, I gather that you believe that current credit terms -- the terms to which you object and want government to restrict -- serve only to inflate issuers' profits rather than to expand the supply of consumer credit.  (If you believed instead that these current terms are what give issuers the incentives to extend more credit than they otherwise would to consumers, especially to low-income consumers, I trust that you would not support the restrictions that you now call for so loudly.)

Because the credit-card-issuing business is quite competitive, I don't share your belief about current credit-card terms.  My strong sense is that the terms to which you object increase the supply of consumer credit.  But if I am mistaken and you are correct, then the best way to help consumers is for you (along with Pres. Obama, Rep. Carolyn Maloney, Sen. Chris Dodd, and other proponents of these government restrictions) to quit your current jobs and start a bank that issues credit cards.

When you more-enlightened and responsive issuers enter the market and offer clearer and more-attractive terms to credit-card users, customers will flock to you!  Other credit-card issuers will either go out of business (assuming, of course, that they're not bailed-out!) or be forced by competition to match your clearer and more-attractive terms.

Unless and until you take this step that puts your own money where your mouths are, I see no reason to credit your claims.

On Food Inspections

Hat tip to Chris O'Leary for alerting me to this report in the New York Times.  It's a report on how food processors in California are paying for their own food inspections.  Because the chief cop-on-the-beat -- Uncle Sam -- does a poor job of inspection, food processors themselves are footing the bill for inspections.

Of course, the report has quotations from persons offering the predictable complaint -- namely, that if food processors are footing the bill for inspection, then the inspections can't be as trustworthy as those done by government. 

Those who issue this complaint overlook several important facts; here are two.  First, the agency that these complainers insist is the only trustworthy inspector (that is, the federal government) has in fact done a poor job.  It's a stretch to say that Uncle Sam is the most trustworthy agency to perform food inspections in light of the reality that he has done this task in an untrustworthy manner.

(Extra credit for those who can pinpoint the flaws in the response that says "Well, Uncle Sam has performed poorly at this task only because its regulatory budgets have been gutted during the past several decades.")

Second, food processors have incentives to create a trustworthy inspection system.  Business for these food processors is better when consumers put more trust in the products offered by these food processors.

(Extra credit for those who can explain how branding and advertising play key roles in ensuring optimal levels of food safety.)

Update: Eric Crampton, over at Offsetting Behavior, tells a telling tale.

You Can't Take the 'Tics' Out of Politics

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

Councilwoman Melinda Katz's letter today reveals an ironic pitfall of government bailouts of private firms - namely, the inevitable demands by demagoguing politicians that recipient firms be hamstrung in their ability to respond to market forces.

Ms. Katz argues that credit-card companies that received bailout funds should be prevented from raising their rates.  While I have no sympathy for any firm that accepted taxpayer funds, the fact is that a firm must be able to change its prices in response to changing market conditions if it is to survive in the market.

By turning private firms into quasi-political entities, bailouts undermine their own ostensible purpose of making these firms strong and nimble competitors.

Sincerely,
Donald J. Boudreaux

Insurance Questions

Tom Wilson, CEO of Allstate Insurance, wants Uncle Sam to regulate his industry more strictly.

Is Mr. Wilson a public-spirited businessman who is proposing a policy that he believes might well harm him and his company but one that will also, in his view, be worthwhile for the public at large?

Or is Mr. Wilson a keen businessman who understands that, in this case at least, stricter national regulation of his industry will benefit both his firm and the public at large?

Or is Mr. Wilson a duplicitous businessman who understands that, compared to the current regime of heavy reliance upon regulation by state governments, a regime of stricter national regulation can more easily be captured by himself and other insurance-industry insiders -- and, hence, is a ticket to higher industry profits extracted from the wallets of customers who will buy insurance in a less competitive market?

I truly do not ask these questions rhetorically.  I know too little about the details of insurance-industry regulation to offer a firm assessment.  I suspect that Mr. Wilson is not knowingly proposing a policy that will harm his company (so the answer the the first question is likely 'no').  But beyond that, I'll not venture a guess as to what's going on in Mr. Wilson's mind.

Your thoughts?

I'm Not A Member of this Religion

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

Paul Singer's case for more government regulation of financial markets has at least two flaws ("Free-Marketeers Should Welcome Some Regulation," April 3).

First, Mr. Singer ignores the possibility that errors made in the private sector - such as balance sheets leveraged too highly - were artifacts, not of too little government intervention, but of too much.  Double taxation of profits combined with deductibility of interest on debt; implicit government backing of Fannie and Freddie; and (most significantly) the Fed's monopoly control over the money supply, are just some government policies that might have promoted the great bulk of the private-sector errors that Mr. Singer laments.

Second, even if today's problems are at root the fault of the market, Mr. Singer writes as if he's proposing new regulations to an apolitical and unbiased agency, one immune to interest-group pressures and to the weaknesses in human judgment that Mr. Singer himself believes contributed to the market's implosion.  I dare say that no error in judgment is so dangerous as the one that leads Mr. Singer and others to regard government as being something akin to a god-like institution.

Sincerely,
Donald J. Boudreaux

Long Live Jurisdictional Competiton

I'm eager to read this latest paper by my co-blogger at Market Correction, Andy Morriss.  Here's the abstract:

The legal regimes of offshore jurisdictions have historically differed in significant ways from those applicable in onshore jurisdictions. Inevitably, legal and financial professionals have seized upon these differences to develop strategies for reducing transactions costs. A prominent example of such cross-border arbitrage was the routing of Eurodollar loans through a small group of former Dutch island colonies in the Caribbean, a practice which peaked in the mid-1980s, when virtually every major U.S. corporation made interest payments to a Netherlands Antilles finance subsidiary. The "Antilles sandwich" strategy exploited the difference between high U.S. withholding tax rates that applied to interest payments made to most foreign lenders, and the zero rate of tax that applied to U.S. interest payments made to residents of the Antilles under its tax treaty with the United States. Both jurisdictions reaped significant benefits from the strategy until the United States unilaterally terminated the tax treaty in 1987, virtually wiping out the Antilles offshore financial sector overnight. Unfortunately, because of rigidity in its governance structure, the Antilles' failed to develop alternative financial intermediation strategies to replace the Antilles sandwich structure before its demise.

The rise and fall of the Antilles' offshore financial sector provides insight into the current struggle between onshore and offshore governments over the role of offshore financial centers like the Antilles within the global economy. Concerned about tax evasion by their residents, onshore jurisdictions including France, Germany, and the United States are pressing for major changes in offshore jurisdictions' legal and regulatory regimes that may eliminate legitimate opportunities for international arbitrage. In such an environment, offshore financial centers may find it difficult to survive. In this article, we distill from the Antilles experience a theory of "regime plasticity" and examine the role that it plays in allowing offshore financial centers to adapt to changes in the legal and political environments within which they operate. How offshore financial centers react, and whether they have learned the lessons of the Antilles' experience will play a major role in determining the future of the global offshore financial sector.

Risks to Rise Exponentially

In today's Wall Street Journal, Peter Wallison nicely dissects a truly frightful proposal of a man who is, quite Frankly, a hypocrite of first rank.  Here are Wallison's opening paragraphs:

After their experience with Fannie Mae and Freddie Mac, you'd think that Congress would no longer be interested in creating companies seen by the market as backed by the government. Yet that is exactly what the relevant congressional committees -- the Senate Banking Committee and the House Financial Services Committee -- are now considering.

In the wake of the financial crisis, the idea rapidly gaining strength in Washington is to create a systemic risk regulator. The principal sponsor of the plan is Barney Frank, the chair of the House Financial Services Committee. A recent report by the Group of Thirty (a private sector organization of financial regulation specialists), written by a subcommittee headed by Paul Volcker, also endorsed the idea, as has the U.S. Chamber of Commerce and the Securities Industry Financial Markets Association.

Anyone who imagines, even for a split second, that this sort of regulation is a good idea is hopelessly delusional.

On Regulatory Burdens

The Competitive Enterprise Institute's Wayne Crews penned this important op-ed appearing in today's Washington Times.

Hanke on Exchange Controls

A friend recently asked me about exchange controls.  While answering him, I recalled this excellent essay penned several years ago by Johns Hopkins University economist Steve Hanke.  Steve's essay is well worth reading.

Dishonest Disclaimer

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

To the Editor:

 

You report that "New York State Attorney General Andrew Cuomo is in discussions with Rep. Barney Frank and other lawmakers on a plan to tie Wall Street pay to the long-term performance of the firms" ("Cuomo, Frank Seek to Link Executive Pay, Performance," March 13). But lest anyone conclude that Messrs. Cuomo and Frank propose giving government excessive power, we're assured that "A person close to Mr. Cuomo said change is needed but the intent isn't to micromanage or interfere with the private sector."

 

Reality is not changed by dishonest disclaimers. Suppose that I threaten to break my neighbor's knee-caps if I determine that the weekly allowance he gives to his children is too high. Should he be reassured if my threat is accompanied by an announcement that my intent isn't to interfere in his private life?

 

Sincerely,

Donald J. Boudreaux

I wonder how Mr. Frank and his fellow members of Congress would react to a proposal to tie their pay to the long-term fiscal soundness of the U.S. government.

Morriss on Madoff and the S.E.C.

Here's another great letter-to-the-editor (of the Wall Street Journal) from my friend (and Market Correction co-blogger) Andy Morriss:

Colleen Kelley, National Treasury Employees Union president, defends the SEC’s “front line” employees against charges that they ignored the Madoff fraud under their noses by declaring that it is all the Bush Administration’s fault. (“Don’t Blame the SEC’s Employees,” Letters, Feb. 13). Give those “front line” employees “adequate staff and resources,” “appropriate regulatory authority … consistent with the growing complexity of financial instruments and trading techniques” and “leaders committed to the missions of their agencies” and there will be no more Madoffs! This is not just nonsense but self-serving nonsense on more steroids than all of our home run champions combined.

The Madoff fraud was one of the oldest games in town, a Ponzi scheme. There is nothing sophisticated or new about such schemes – indeed their name refers to Charles Ponzi, who defrauded investors in the early 1900s. Even earlier, such frauds were so well known that Charles Dickens included one in his 1844 novel, Martin Chuzzlewit. Moreover, the Journal’s coverage of the Madoff scandal has uncovered dozens of fund managers who rejected opportunities to invest with Madoff because they undertook simple steps such as calling exchanges to see if the volume of trades Madoff claimed to be making were occurring, comparing Madoff’s suspiciously consistent levels of returns to historical averages, attempting to replicate Madoff’s strategies in simulations, and talking to Madoff and observing his unwillingness to provide information on his strategy and suspicious use of a tiny accounting operation.

In truth, Ms. Kelley’s members failed to uncover a type of fraud well known for over 150 years and which others with smaller budgets (and zero regulatory authority) did uncover. We don’t need to reward the SEC’s failure with more resources, more authority, or more employees. And we certainly don’t need advice on how to regulate from a union that represents the regulators who failed. Instead, we need to stop pretending that government can protect investors from people like Mr. Madoff and tell investors to do some due diligence themselves. The right consequences of the Madoff scandal are that Mr. Madoff go to jail, those of Ms. Kelley’s members who failed to act on Madoff despite the many warnings the agency received about him lose their jobs, the SEC either get to work or close up shop, and the investors who lost money in the scheme be more careful who they trust with their assets next time.

Andrew P. Morriss

H. Ross & Helen Workman Professor of Law and Business
Professor, Institute for Government and Public Affairs
University of Illinois

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.

Too Much Deregulation?

David Henderson argues that what ails the economy is not too much deregulation.

Cowen on the Great Depression and New Deal

Here's Tyler Cowen, writing in the New York Times, helping to set the record straight about the Great Depression and the New Deal.

Oh, please

President Bush has lost the right to say this.

No More Bailouts

Over in The Wonk Room, Pat Garofalo argues that "If It Happens, The Auto Industry Bailout Needs To Be Done Right."  While it's true that some ways of bailing out this industry would be less harmful than other ways, there is absolutely no "right" way to do it.  To advise government to do the auto industry bailout "right" makes as much sense as advising a burglar to burgle the neighborhood houses "right."

And, unfortunately, Garofalo himself advocates a condition of the bailout that would make it worse than it would be if Uncle Sam simply gave $50 billion to GM, Ford, and Chrysler.  He wants the money to come along with a government mandate:

More importantly though - as Pelosi and Reid said - “federal aid should come with ’strong conditions,’ such as requirements that car makers build more fuel-efficient vehicles.” Bill Scher at OurFuture writes, “With the auto industry in dire straits, we taxpayers have maximum leverage to demand the cars necessary to help lower energy costs, cut carbon emissions and reduce our dependency on foreign oil.”

Producers should serve consumers who express their demands in the market -- consumers spending their own money in settings in which each individual's choice is decisive.  Danger lurks in policies mandating that producers serve politically voguish ideas masquerading as taxpayers' interests.

I'm no fan of carbon taxes or of the inherently vague notion of "energy independence," but if Uncle Sam is so terribly worried about carbon emissions from automobiles and Americans' purchase of oil from other countries, then the best way he can deal with those concerns is to raise gasoline taxes.  Auto producers and consumers would then experiment and respond with different ways and find those ways (note the plural) that best suit as many consumers as possible.  Mandating greater fuel-efficiency sounds progressive, but it's dumb and dangerous.

Covering Their Arses

University of Missouri-St. Louis economist David Rose sent the following to me by e-mail regarding Uncle Sam's bailout of GM, Ford, and Chrysler:

Here is what is especially galling about this. If central planners took overt control of a number of industries and then ran them into the ground, then there would be a clear lesson learned. Instead, they take partial control through regulation and now through "investment," still run such companies into the ground, but can then blame it on the market system.

Exactly right.

The Rules of the Game

Bob Higgs claims that "regime uncertainty," the uncertainty about the rules of the game, is what made the New Deal so ineffective. Because business didn't know what the government was going to do next, people were hesitant to invest and take risk in the 1930s. It's possible but it's very hard to measure. Maybe investors were discouraged by the lack of opportunities in the economy or some other reason.

At the end of last week, the government announced that insurance companies were next to be bailed out. It became clear that firms were lining up making the claim that they too deserved government help. The effect that Higgs had written about feels palpable right now. When you know the government can save your company and your bottom line, you start spending an increasing amount of time on that possibility rather than trying to actually turn things around or look for private suitors. When you're not sure about the rules of the game, risk-taking and investing becomes much more uncertain than usual.

In today's WSJ, I argue that government policy appears to be making things worse and that doing nothing, at least for a time, is probably better. Of course, government has a problem with credible commitment. Doing nothing cannot be guaranteed to last for very long. And unfortunately, neither  presidential candidate has a commitment even to the principle that doing nothing might be the best policy. Such a principle might make a commitment to inaction somewhat credible. But even though the commitment to do nothing might be only temporary, I think it still would be useful for alternative strategies to the current one (so something, anything) to emerge and generate a consensus as to whether such alternatives might be preferable to the current scattershot approach of doing one thing today and something else tomorrow. Such uncertainty has to affect the calculus of risk-taking.

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.

Garrison on Greenspan

Here's a letter that I sent a few days ago to the Wall Street Journal:

To the Editor:

Alan Greenspan now blames deregulation for today's financial turmoil ("Greenspan Admits Error to Hostile House Panel," October 24).  Whatever deregulation there was, and whatever its merits or demerits, there is one crucial financial instrument - dollars - that throughout was supplied by an utterly unjustifiable state monopoly - the Fed.  Unfortunately, this decidedly unfree-market arrangement draws little attention.

Skepticism is advisable when the former head of a government-created and protected monopoly blames the market for using that monopoly's output unwisely.  Would the demand for mortgage-backed securities have been as frothy as it was if Mr. Greenspan's Fed had not created so much new money?  Would the demand for owner-occupied housing itself have been so intense?  Because money plays a common and vital role in all of these transactions - and because Mr. Greenspan's Fed kept pumping dollars into the economy with no way to know what the 'correct' supply is - you'll pardon my inability to give credence to Mr. Greenspan's latest pronouncements.

Sincerely,
Donald J. Boudreaux

This 2006 essay by Auburn University's Roger Garrison is prescient.

Changing Times

I reflect here on the much-predicted coming of much more government regulation.

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.

Milton Friedman on Fetters

This essay at Forbes.com describes Milton Friedman as a "champion of unfettered markets."  This description reflects a common but unfortunate misunderstanding.

Milton Friedman championed not unfettered markets, but markets fettered by competition and consumer sovereignty rather than by political diktats.  Friedman understood that fetters imposed by government are neither the only nor the best means of keeping markets working well.  Indeed, far too often - as Friedman knew - fetters imposed by government turn in practice into crowbars that businesses use to break free of the competitive shackles that oblige them to behave prudently and fairly.

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

Denationalizing the Drug-Approval Process

Here's my colleague Dan Klein arguing -- effectively, in my opinion -- for denationalizing the process of approving drugs.  The clip lasts about seven-and-a-half minutes.  It is well worth watching.

Rewriting history

With financial markets in tatters and the housing market in shreds, it is popular to claim that it's all the fault of Reagan-era deregulation.

Just for the record, deregulation began as a serious public agenda in the Carter administration and credit should go to Alfred Kahn who championed it and defended it.

When things were going well, some people liked to point out that it wasn't Reagan, but Carter who started the ball rolling. Not if anything bad happens, it's because of deregulation and we all know that's Reagan's fault, right?

If they could blame it on Herbert Hoover, they would.

Of course, government regulation, defined by limits on voluntary exchange has been rising for a long time. Go here (see Table 1) for measures of how much spending and staffing have grown in every decade since 1960.

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

The Noble Motivations Behind Regulations (Or, "We'll Take You to the Cleaners")

Baptists, Bootleggers, and Workin' in the Car Wash Blues -- and Greens (of both varieties).

(HT Chris Meisenzahl)

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

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)

"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.

She Earned an F

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

Hillary Clinton wants government to temporarily "freeze rate hikes in adjustable-rate mortgages" ("Let's Keep People In Their Homes," September 25).

The Senator's reasoning is akin to that of weak students who - offering excuses such as "My grandma died" - ask me to change their grades.  I always refuse by saying that grades are like market prices: they reflect an underlying reality.  Were I to change a student's grade arbitrarily, I wouldn't change his actual performance in my class or his command of the material.  I would merely send to the world a false signal about him, and encourage him to rely on such excuses in the future.

As a teacher, I can't make students smarter simply by lying about the grades they've earned.  As a Senator, Ms. Clinton can't make housing more affordable simply by forcing mortgage terms to lie about the reality of high risks and scarce credit that are reflected by unregulated mortgage-interest rates.

Sincerely,
Donald J. Boudreaux