How some think

[fpb]

This was actually published today, by a conservative commentator, as something worth saying in a discussion:

The truth is that we don't have a free market -- government regulation and management are pervasive -- so it's misleading to say that "capitalism" caused today's problems. The free market is innocent.The amount of non sequiturs, false

Comments

[arhyalon]

I have to disagree with you, I am entirely in agreement with this statement. Much of the financial problems in America were caused by places where the government had interfered in the market to cause an incentive. Once the government does this--like urging banks to give out certain kinds of loans that a wise bank would not issue--the situation is no longer capitalism.

I don't know what you do call it. It's not exactly socialism either, but it is not a free market because none of the pressures in a free market that tend to correct for abuses are allowed to oporate once the government regulation is in place.

In fact, every major financial problem in America in the last thirty years has been in markets where the government regulations allowed for some foolish behavior and forbid the forces that would naturally stop this behavior.

For years, I've pictured this as a bull who is charging, but tied by one foot, so he runs in a circle instead. He can never charge straight ahead and get where he's going, because some other regulation is still impeding him...leading to a bad result.

[fpb]

I never expected you to agree with me. But my view is that the whole area in question is nothing more than a verbal trick. If you like and approve of a state intervention, you call it law, and declare it sacred; if you do not, you call it regulation and claim it interferes with the sacred free market. But in point of fact there is no difference between a law against murder, a law against intolerable working conditions, a law against false statements on labels, and a law regulating prices and wages: they all are "interventions" of the State, "interfering" with the free market by exactly the same statutory and force-backed ways. To draw a line between them and claim the ones to be virtuous and the others wicked, is to disregard their own nature. Even laws regulating prices and wages have their times of being useful (in wartime).

[arhyalon]

Ah, but there is such a thing as a good law and a bad law. A good law against murder discourages murder. A bad law would encourage it by accident or perhaps punish some but not others for similar crimes.

And there are good regulations and bad regulations. Because lawmakers seldom understand what the effects of their work is upon the economy, regulations regularly have bad effects that were not intended by those who made them. These bad effects are sometimes mitigated by later additional regulation. Sometimes, they are left to fester until a really bad thing happens (like forcing banks to offer loans to low income people who cannot pay them back, and then being surprised when this leads to a bad result.)

Good laws lead to a good state. Good regulations help protect against abuses and fraud. But in a world where lawmakers pass laws without understanding the consequences, we have many bad regulations...probably more bad regulations than bad laws concerning theft and murder, because the effect of those laws is easier to see.

In particular, quite a few financial troubles of the last several decades in America involve a regulation that encouraged a bad activity that would never have happened had the government not stepped in to begin with.

I wish there were a better, quicker way of ascertaining the results of an economic regulation. I suspect both you and I would not want to live in a world were there were none at all, and yet there are so many that cause damage.

[fpb]

Thre are two things that I object to. First, the invention of an imaginary free market with no evil state intervention - when the market itself is a product of the laws and could not exist without regulation. Second, the claim that all financial disasters and crimes are primarily caused by bad state intervention. This, to me, is nothing more than moral escapism: blame the State for the collective infatuations of thousands of free agents who deliberately threw themselves into what seemed, at the time, rivers of gold. Not our fault, of course not! That some regulations are bad or damaging or dangerous I do not argue; that speculative bubbles and ramps are in any way primarily caused by bad regulation I will believe when I believe human beings have ceased to be moral agents. Nobody obliged anyone to take a stupid debt, but thousands of people did, and thousands of people - naively or worse - took jobs which depended on their selling bad debts.

[arhyalon]

You make a good point.

There are factors in the free market that tend to correct for certain abuses if left alone, but, of course, there are other abuses that are not corrected--or not corrected quickly enough, to make a complete free market a wise idea. For one thing, one would at least need criminal laws to stop fraud.

As to the second, I do think that in particular the last few financial catastrophies in America were enabled by government regulation...but you are entirely right that a dose of good judgement would have kept those loopholes from becoming disasters.

I have a friend who was offered a huge loan by their bank. They had the wisdom to refuse. But there are others who were not as wise--particularly because, up to ten years before, one could rely on banks to tell you how much you could afford wisely. Anyone who still trusted their bank to do this suffered.

They are the innocent ones.

But what about the banks who were doing this? They did not need to indulge in such outrageous behavior? Or banks that encouraged people to lie about whether or not their purchase was for living or investment? The very idea of a bank encouraging someone to lie on a form is outrageous.

So, you are entirely right that the many, many individules who deliberately chose to take steps they had reason to know were unwise are responsible for the disaster that followed.

The government is at fault for creating misleading incentives...but each person who knowingly followed up on those incentives is also at fault.

I do not blaim anyone who was deceived into thinking that they were doing the wise thing. I think they are the victims here. (I have friends who were assured by realtors, etc, that they would be able to do this or that to make an nigh-unpayable bill more affordable later. Some of these friends are really struggling now, and they just didn't know they were being mislead. I really feel for them.) These people are, I feel, different from people who knew very well that they could not afford something, but accepted the debt anyway.

What saddens me the most is that many of those in the business must have known what they were doing was wrong...because they have recently switched to outright fraud. Many ex-mortgage companies and lawyers are now offering debt protection programs that are just fraudulent. They take people's money and do nothing. There are thousands of complaints about this per state.

So, while I do agree that we, at least in America, do not have a fully free market and that government regulations contributed to our current distress, I also agree with you that the individuals who took advantage of the situation are equally responsible.

What puzzles me the most is that I knew several people who predicted the real estate crash in 2004 or 5. (One was an economist friend who spoke on a panel that was visited by John McCain. McCain later sponsored a bill to try to halt some of the abuses going on at the time. He was voted down. The opposition claimed he was racist because the loans he was trying to stop could help poor people.) If these folks knew it was coming, how come the guys whose whole livelihoods depended upon it could not see it and prepare.

I am reminded somehow of the seven fat years and seven lean years in the Bible...but we are without a Joseph who correctly predicted what was to come.

[arhyalon]

As I said above, I'm all in favor of laws restricting fraud. I do not think one can have civilization, much less a market place, without such laws.

[arhyalon]

Sorry...wasn't clear. I think bad loans were sufficiant for the current real estate crisis...forclosures, etc. But you re entirely right that the general crisis goes far beyond that.

[fpb]

Well, no, that is not the primary problem with Britain. The problem is that the public were encouraged, over a period of thirty years, to get themselves into debt on increasingly overpriced brick-and-mortar collateral, at the same time as the State lost revenue because of the collapse in domestic manufacturing and squandered the revenue it had. As a result, Britain today is unpayably in debt on both sides: most British citizens owe more on their homes than they can ever repay, while the State needs to either make dramatic cuts or raise taxes, both of which will increase the general misery. The country badly needs political leadership, and has none.

[fpb]

Bear in mind that we had no such bad laws in Britain, and that our situation is, if possible, worse than the USA's. It was simply a bipartisan orgy, in which I can only say with very modified satisfaction that I was never tempted to take part. I could not have afforded it, but that did not stop many people.

[arhyalon]

By the way, you've probably seen this, but if you haven't, it is both funny and sad, as it came out in 2007...a whole year before things really went bad.

http://www.youtube.com/watch?v=mzJmTCYmo9g

[stigandnasty919]

I'd have to say that you were half-right in your assessment of the causes of the chaos in the ecconomy. Not only did the government "urge banks to give out certain kinds of loans that a wise bank would not issue". Something that was, in effect, a tax on the banks. The problems came later when another government removed the regulations arround those loans. Fannie Mae and Freddie Mac were left with obligations to give out loans based on certaion critieria, but were not required to actually check that those criteria were fulfilled.

The problem would have been avoided by either having a properly regulated system or a non-regulated system. The compromise caused the problem.

[arhyalon]

>The problem would have been avoided by either having a properly regulated system or a non-regulated system. The compromise caused the problem.

That is really well put.

[fpb]

At which point one has to consider that laws are made for, and by, human beings. Once things had taken a seriously bad bend, where was the incentive for anyone to tell the people the truth? Warren Buffett could do it, because he has made himself so rich that he does not have to care about what anyone thinks. Ambrose Evans-Pritchard could, because he had already made himself a crank in the eyes of most people with his bizarre pursuit of the Clintons for murder; he had no reputation to lose. But what would a politician have gained if in, say, 2000, he had said: our countries are in a dangerous condition, we have to stop this business of borrowing beyond our needs"? He would not even have been listened to; he might not have been re-elected, and he certainly would never have been let anywhere near a leadership position. That is one reason why it is important to place certain kinds of restraint on human activities; that once the restraints go, all the incentives are towards the worse and not towards the better patterns of behaviour.