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Fixing something without understanding the cause

Tue, 09/30/2008 - 08:59 — Monkey Rothbard

One of the things that's been bugging me about all of this ZOMG BAILOUT NOW MUST FIX DON'T STOP AND THINK PASS THE BILL PASS THE BILL ZOMG is that it appears that the congressmen are not only trying to "fix" a problem that they caused, but that they're doing it without giving serious consideration to what caused the problem in the first place. Further, rather than addressing the root causes (Fed policy, for instance) they're just throwing more bad government policy at the problem so we can "move on" and never speak of this again.

So. Since nobody writing or reading this weblog actually gets to vote on the bill anyway, why don't WE take a few minutes and explore some of the policies that might have caused the present crisis. Let's start with these:

The CRA Scam and its Defenders
Did the Fed Cause the Housing Bubble?

Given that government's artificial manipulation of markets got us into this mess, do we really want to "solve" the problem through more massive artificial manipulation of markets (and what is buying bad debt at a higher rate than its value, if not artificial market manipulation?) Or, to put it more briefly, do we want to respond to a failure of Keynesian policy with more Keynesian policy? Or might it be wiser (and more principled) to let those who participated in bad decision making suffer the consequences of their actions? Will banks, businesses, and investors be more likely to make the same mistakes again if taxpayers are forced to bail them out, or if they experience the pain of business and investment failure?

I don't ask these questions as if the answers are easy. But I do marvel that conservatives (in particular) who claim to mistrust the ability of government to effectively resolve even the smallest of economic woes, somehow think that ramming through a quickly-thrown-together piece of legislation that relies entirely on massive government intervention in the economy is absolutely necessary.

UPDATE - More voices questioning the wisdom of the bailout:

Bailout marks Karl Marx's comeback (via Drudge)

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Tue, 09/30/2008 - 09:38 — Monkey Brad

One little bit

(and what is buying bad debt at a higher rate than its value, if not artificial market manipulation?)

Well, nobody I hear is denying that that's market manipulation, but for an educated take on the details behind the pros and cons (particularly about the price paid for troubled assets), I'd recommend listening to this interesting interview with Adam Lerrick, Econ Prof at Carnegie Mellon.

Tue, 09/30/2008 - 10:08 — Monkey Rothbard

You and your fancy-schmancy recorded interviews! In MY day...

Listening to recordings is REALLY impractical for me at work. Does anybody transcribe Prager's interviews, like Duane does with HH?

Tue, 09/30/2008 - 14:03 — David

Too simple

Monkey Rothbard, there are a lot of flaws in this argument.

First, the causes of this crisis are being studied, and will probably be studied in more detail than any economic event since the Great Depression. In fact, the articles you link to point to different causes as the primary reason, which just scratches the surface of the complexity. But I'll stipulate that a major cause of this problem is the government, and prior intervention in this economy, in at least a dozen ways. It's ridiculous to say that because the government caused the problem it doesn't have a responsibility to help fix it--the opposite is true, in fact.

And it is also ridiculous to say that because this bailout plan does not solve the root cause of the problem, it is a bad idea. If a kid falls out of a tree and breaks his arm, do you stand in the ER and yell at the doctor "why are you setting his arm and putting on a cast!? We need to go cut down that tree! That's what caused the problem!"

What is really happening here is a major market breakdown. Free market theory is based on the idea of rational actors acting in their own best economic interests. But it breaks down somewhat in the stampede or bubble effect--everyone buying tulip bulbs and raising the prices to ridiculous levels, or everyone making a run on a bank and destroying it. I heard someone on the radio this mornign suggesting that McCain's example of a lender stopping loans to Sonic Burger franchisees is just what happens during an economic downturn, and it is normal and healthy.

But there are two flaws in that: first, it ignores what McCain went on to say, that this lack of funds hurts Sonic employees, construction workers who would build or improve franchises, and so on. Second, and more fundamental, is that in bad economic times, it is normal and healthy for lenders to be more cautious about where they put their money. But this is a different case--the lender isn't being cautious because of evaluation of the future risk of that loan (at least not directly). The lender is being cautious because of the risk of past loans, to different people (and holdings in even more complex financial intruments). This sort of credit logjam is poisonous, and not a "natural" free market event. The government needs to unblock that logjam, and has a responsibility to do so.

We can argue about the exact methods they use to do this, and who benefits, and how it is controlled and so on, but to suggest they shouldn't on free market libertarian grounds is not only wrong, but misunderstands free market economics.

Tue, 09/30/2008 - 14:35 — Monkey Rothbard

Analogies and clarifications

It's ridiculous to say that because the government caused the problem it doesn't have a responsibility to help fix it--the opposite is true, in fact.

Well, that's not precisely what I said. Rather, I think a better paraphrase would be to say that:

  1. You can't necessarily trust the person who caused a problem to have the best solution for it.
  2. It's usually unwise to try to solve a problem by employing the same methods that got you into the problem in the first place.

So, to take your "kid falls out of a tree and breaks his arm" analogy and rephrase it, I would say that:

  1. The kid didn't fall out of the tree, he was pushed.
  2. The kid that did the pushing is the one telling everyone how to fix the first kid's broken arm.
  3. His idea to fix the broken arm is to drag the first kid back up into the tree and push him out again.

Also, it's worth pointing out that the cause-and-effect equation, as well as reliable solutions with regard to broken arms is remarkably different than with something as remarkably complex as an economy. It kind of reminds me of that scene in "Twister" (yes, it was awful, but don't let that be a distraction) where the tornado rips through the small town, and the protagonists find the friendly old lady (someone's mother?) being carried off on a stretcher. Just as they are about to put her in the ambulance, she looks up at the storm-chasing protagonists and says, "You stop this!"

So, without giving a specific recommendation other than the general principle of not doing something just to be doing something, I thought it would be worthwhile to explore some of the reasons why systems fail, and consider if the radical action being proposed by Washington is really the proper response to this particular failure. As I said, "Since nobody writing or reading this weblog actually gets to vote on the bill anyway..."

Tue, 09/30/2008 - 16:05 — David

Analogies smanalogies

Don't get lost in the analogy. Also don't get lost in economic models or ideological models--they are just that, models. (There was nothing "Keynesian" about the polices that caused this crisis, by the way--is "Keynesian" just an all-purpose derogatory epithet for libertarians?)

There are multiple solutions required to this crisis. As a libertarian, I would think that you would not want Congress to rush to fix all of the regulatory problems that caused it, since speed would almost certainly mean even more flawed regulation.

But would you agree that when the government has helped to create a crisis in credit and liquidity, and further has allowed the creation of complex financial instruments that make unsticking the logjam almost impossible, that someone needs to step and provide funds to restore confidence and end the crisis? Especially since the alternative is a wider collapse that will hurt many--say, anyone with a 401K--who played no part in causing the problem? And, because of a regulatory environment you may hate, but which exists, will require taxpayers to take on most of these failures anyone (through the FDIC, for example)? (By the way, the current regulatory structure almost ensures that those who did take the big risks will not be harmed much, especially given the gains they made.)

And the only someone who has the financial strength to do this is the Federal Government. You may wish it otherwise, and wish the government was smaller, but wishing doesn't make it so. The Feds are the only game in town, and I dearly hope this stop this soon, because otherwise I confidently predict wider collapse, more government intervention down to the level of people's credit card bills, and the creation of at least one and probably more large government agencies whose mission it is to interfere constantly in the economy, not just en extremis.

I understand the dream of many idealists is that economic collapse will bring about the world they desire. I was walking through the park in Santa Barbara a few weeks ago, and saw some young hippies setting up tables selling used clothing and other junk. I overheard one say "after the collapse, all markets will be like this!" And I know libertarians dream that a strong hit to the current financial system, with the government and quasi-government agencies like the FED, will cause a collapse into a libertarian paradise. Given that the Great Depression led to the New Deal, the collapse of the post-World War I German economy to Nazism, and Panic of 1893 led to the rise of the modern interventionist state (even as it inspired Schumpeter to write of "creative destruction") I would expect that libertarians would be no more fond of a world after a new great depression than the hippies would be.

Tue, 09/30/2008 - 19:52 — Monkey Rothbard

Re: Unelugeees und clereefficeshuns

Bork bork bork!

Bork Bork Bork

Also don't get lost in economic models or ideological models--they are just that, models.

Not exactly. Theoretical presuppositions drive policy. For example:

5. Many, but not all, Keynesians advocate activist stabilization policy to reduce the amplitude of the business cycle, which they rank among the most important of all economic problems. - Alan S. Blinder, former vice-chairman of the Fed

(There was nothing "Keynesian" about the polices that caused this crisis,

I beg to differ. From the WikiPedia article on Alan Greenspan:

However, Greenspan's policies of adjusting interest rates to historic lows contributed to a housing bubble in the US. The Federal Reserve acknowledges the connection between lower interest rates, higher home values, and the increased liquidity the higher home values bring to the overall economy.

Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission. —Board of Governors of the Federal Reserve System, September 2005.

In a speech in February 2004, Greenspan suggested that more homeowners should consider taking out Adjustable Rate Mortgages (ARMs) where the interest rate adjusts itself to the current interest in the market. The fed own funds rate was at an all-time-low of 1%. A few months after his recommendation, Greenspan began raising interest rate, in a series of rate hikes that would bring the funds rate to 5.25% about two years later. A triggering factor in the 2007 subprime mortgage financial crisis is believed to be the many subprime ARMs that reset at much higher interest rates than what the borrower paid during the first few years of the mortgage.

by the way--is "Keynesian" just an all-purpose derogatory epithet for libertarians?)

Only Paleos. Those cosmos over at Cato are all on board with firing up the cash printing machines. Also, it's more of an all-purpose economic derogatory epithet. When we're talking about foreign policy, we prefer "neo-con."

Wed, 10/01/2008 - 07:33 — Monkey Brad

Re: Underwear and Clearasil (swedish stylee)

A triggering factor in the 2007 subprime mortgage financial crisis is believed to be the many subprime ARMs... As any good Wiki critic would say, "Citation needed." A factor, yes. But even with a citation, a housing bubble and some foreclosures does not a liquidity logjam make.

I still say, any explanation or prescription that doesn't take into account the unprecedented multiples of leverage and the new securitized bad loans bundled into others, which is freezing the bank-to-bank lending, doesn't address the core components of the present situation.

As for models, yes, they can influence actors. But that still doesn't make them anything more than models. Models are incomplete. Weather prediction models, for example, have been affecting policy and people's actions for several years now. But no meteorological model is anywhere close to exhaustive. Even those considered authoritative are recognized as full of holes. So, counting on them to be sufficient to predict or explain the wildest deviations, or harshest storms or seasons isn't practical. I think that's what David was driving at. Keynsian, Austrian, Artesian, and fashion models -- none of them seem to have the current growing credit lock-up accounted for.