Wednesday, October 1, 2008

Touching faith

Because Ron Paul is an acolyte of Ayn Rand's pure and simple-minded economic libertarianism, he cannot conceive of a government intervention in the market that would help the aggregate economy. He has a touching faith that the free market will always provide the best of all possible economies.

It's bunk, and the current crisis proves it. The market, freed from rules restraining the leverage of capital and keeping risk visible, inevitably corrects itself with a nasty recession. Paul won't admit it, but he is willing to countenance a depression in order to save his worldview.

Paul is right about one thing: Real estate has been overpriced, and the resulting bubble is the proximate cause of our current financial situation. What he doesn't seem to understand is that, just as easy credit causes markets to overshoot, lack of credit kills markets and businesses that would otherwise be solvent and very useful to sustained economic activity.

The bad thing about a bailout is that it does not punish the guilty, those who have caused the bubble. The good thing about a bailout - one that works, anyway - is that it prevents nasty damage to the economy that all of us rely on to make our lives.

The brief history of this bailout:

  • Paulson proposes a typical Republican approach: Give money to the market with no strings attached and have faith the market will take care of us.
  • Congressional leaders add some elements of a typical Democratic approach, though pretty centrist at that: Spend the money instead of giving it away. Get equity, limit deductibility of executive pay (which John McCain supports for the first time in his life for faux populist political reasons), provide fig leaf oversight of the power-mad Bushists.
  • Republicans in the House promise to deliver a majority of their caucus, but they fail, duplicitously or otherwise.
  • Democrats in the Senate offer tax cut and tax credit sweeteners to the Republicans. Once again, the Dems choose to lose to hardball Republican tactics. You might call them responsible enablers. If they had picked other items, you might be right, but the new provisions do hardly anything to actually address the credit problem. Thus the new bill is worse than the old one - more expensive with no more effectiveness.
It's pretty clear that the Europeans have the right idea: Recapitalize the credit markets by taking equity stakes. Yeah, that's socialist. But when the credit markets have been stable for a while, unwind those positions back to the private capital that is currently too afraid to lend itself out for useful economic purposes. Oh, when unwinding, make a profit if possible off the very people who made all this fun stuff into news. That would be a mixed economy's best revenge.

Update: More good sense from Paul Krugman.

Update: My CNN comment threads stay open long after CNN closes theirs.

12 comments:

Anonymous said...

You realize that this crisis is a result of government intervention not a lack thereof, correct? Without a government sanctioned monopoly, the FED wouldn't have complete control over the money supply and none of the subsequent easy credit policies would have been possible.

Anonymous said...

If he was so smart, why isn't he on the ballot? One thing the media should do is to quit interviewing guys who ran failed campaigns. I hate Monday morning QuarterBacks. Huckabee is the biggest of them all but Paul has no clue what he is talking about right now.

Mad Puppy said...

He is an "acolyte" of Rothbard, not Rand. And he is correct. Witness that he couldn't pay to get on CNN or any of your other precious main stream nets, but now, when they need an expert, he is all over the place.

Anonymous said...

Try looking up the Community Reinvestment Act. It put a mandate on banks to make risky loans to those in less advantageous communities and social groups. It also lowered the reserve requirments for Fanny and Freddie backed morgages allowing them to make risker loans without much capital. Combine those government mess-ups with the artifically low interest rates put out by the Federal Reserve in the early part of this decade and you get the government creation of an asset bubble. The bailout seeks to keep that bubble inflated.

xrazorwirex said...

yeah, sounds like you didn't even read what the man said and just reloaded the same cannon his opponents have been firing for years. For every situation you come up with where government helped the market, its always saving it from a problem that the government caused in the first place.

This is a case of Problem A being solved with Answer B, which in turn creates Problem C, but instead of looking back at Answer B which caused the problem, you people ignore it and look for a new Answer D, which just in turn creates Problems EFGHI and so on!.

And the great irony is that Problem A WAS AN ARTIFICIAL PROBLEM I THE FIRST PLACE!

miltonfriedman.blogspot.com has some good films arguing this point.

Ergo,
What were the first financial institutions to fail in this chain of events?

THE ONES OWNED BY THE GOVERNMENT!

And if you read what people were saying about FM^2 long before the crisis (oh no! cant do that) you might find a couple (alot) of articles written by ron paul, peter schiff, and other fellows at the Mises Institute describing THIS EXACT SITUATION!

Billy V said...

"If he was so smart, why isn't he on the ballot?"

Because people like you didn't want to hear the truth. He's been calling this day coming for years but people were only interested in going along they're merry way - until it's too late.

Just keep believing everything the government and the news media spoon feeds you but I hope you know how to survive when the dollar collapses.
This bailout will weaken the dollar and inflation will go sky high before the depression hits.

lovable liberal said...

If the Fed didn't exist, we'd have one of these panics every ten years. Without reserve requirements, every credit institution has to be a Ponzi scheme to compete. While we're listening to Ron Paul, we can go back before there was equity financing. That would be sooo much better.

A bailout tries to bring the bubble in for a soft landing. It's still going to hurt because of all the blind deregulation of the past thirty years.

Doing nothing is the option for idiots who haven't looked at history for previous examples. Yay, let's have some more Hoovervilles to wring all the high prices and bad debt out of the system. Who knows what will be left here when that's done, but the graven idol of the free market always provides. Doesn't it?

lovable liberal said...

Billy V, if you're worried about inflation, you're a few beats late. The danger is severe contraction and deflationary feedback through the economy as a whole.

Anonymous said...

"The market, freed from rules restraining the leverage of capital and keeping risk visible, inevitably corrects itself with a nasty recession."

Yeah right. Folks such as yourself wrongly assume that we HAVE a free market. With the Federal Reserve constantly inflating the money supply and artificially controlling interest rates, Fannie Mae/Freddie Mac/FHA, etc. ostensibly making the federal government the guaranteer of all loans, and legislation such as the Community Reinvestment Act encouraging if not mandating malinvestment, we have anything but a free market. All of the natural forces of a free market that balance each other out have been suppressed by the heavy hand of government intervention. When imbalances result, business enterprises rightly attempt to profit from those imbalances. But the root problem was the government intervention, not the profit motive. Additionally, folks such as yourself like to harp on the effective repeal of the Glass-Steagall Act as the lynchpin of the deregulation gone mad argument. Again you miss the root cause. That act allowed arrangements and collusions that have caused some market havoc. But that could only happen because preexisting goverment intervention created conditions that insulated investment banks from dangerous risks.

lovable liberal said...

Hey, 5:48, read my comment at 5:06, the one where I allude to what would happen if we did have a completely free market. So, not guilty as you have charged.

Let me state it more clearly: If we build an economy that's reliant on equity financing for its obvious and proven benefits through faster growth, and we don't regulate lenders, then we will have really bad contractions with great frequency.

Yes, there are still regulatory features of the post-Depression regime. Yes, the government still intervenes and not always well. Fed policy under Alan Greenspan during the early years of Duhbya fomented this bubble, and he's a Randian.

But your statement that the government insulated the investment banks from risk is breathtakingly assbackwards. What the government did was remove (and fail to extend) protections that had prevented the banks, bankers, mortgage originators, et al from following their own short-run self-interest into a bubble whose natural outcome is a harsh contraction.

Billy V said...

What the government just did was give a temporary fix to a junkie.
You haven't seen inflation yet.
The government is going to loot our savings with much higher inflation and turn the dollar to confetti.

I hope you can fish and hunt.

lovable liberal said...

Bad news, Billy V, we don't have any savings. You may and I do, but America doesn't have anything except the vanishing equity in our homes left to loot. Oh, right, not much left there, either, and it's not liquid because so few people are buying.

I'd recommend you take a course in macroeconomics. Hell, I should take another one myself, this one with more emphasis on finance and economic organization.

Again, though, the problem we face - the problem that makes all the suburban deer population nervous - is not inflation or hyperinflation. It's a positive feedback of reduced economic activity (you know, working, starting new projects, making, importing, and selling stuff) that leads to massive unemployment and poverty, deflation of all prices (sounds great, but it's disastrous in a credit-dependent economy), and very difficult and slow recovery.