A smack down of Michael Gerson, who never fails to unimpress. And, as Glenn notes, there is nothing generous about being charitable with other peoples’ money.
93 thoughts on “Libertarianism Versus Selfishness”
Comments are closed.
A smack down of Michael Gerson, who never fails to unimpress. And, as Glenn notes, there is nothing generous about being charitable with other peoples’ money.
Comments are closed.
“Its a mere statement of fact that Libertarianism is a belief system based on faith instead of a solid foundation of reason. . . .”
Yeah, not at all like the Cult of the State.
But seriously, since you are obviously the Master of the Syllogism,can you show us, logically, why you and your gang are entitled to rule us? Why you actually have a right to our lives and property? How do some people get the right, for example, to coercively redistribute other people’s wealth? Please, enlighten us, ” Voltaire.”
Bilwick,
Where have I said I wanted to rule you? I am merely pointing out the weaknesses in Libertarianism being faith based instead of logic based. I guess your changing the subject is admission you have lost.
Thomas Matula Says:
” I am merely pointing out the weaknesses in Libertarianism being faith based instead of logic based.”
Logic is faith based. Even Vulcans understand that.
BilWick,
“You haven’t a clue what Social Darwinism is do you?”
Okay, so tell us what it is. You’ve been flinging it around, so I’m sure you’re well versed in the subject. I’ve never encountered any “liberal” who used it in what I would consider its proper historical context, so I may be prejudiced (albeit a prejudice based on experience). I’ve gotten used to it being like “neocon” and “trickle-down economics:” a sign worn atop the user’s head, with a downward-pointing arrow and the warning “No actual thinking going on in here.” But I could be wrong.
And more importantly, is it a bad idea? You seem to think so. Assuming you don’t come up with some bogus straw-man definition of the term –and that’s a mighty big assumption, granted–can you refute it?
For that mater, is selfishness bad? If so why? And if it’s selfish to value liberty, are statists unselfish–and if so, why is that good? You made a big deal (perhaps trying to divert the narrative) about my mention of Branden’s statement about every breath you take being a selfish act, so I’m still waiting for you to show where his statement is invalid. Are you saying that every time a collectivist takes a breath, it is for the Common Good? Maybe they do: They would be that stupid.
And while I know you guys love to divert the narrative, if we may return to the original points of Rand’s post and your own original comment, assuming Social Darwinism is a bad idea, can you show where it is intrinsic to modern libertarianism and how many significant libertarian thinkers and writers–or writers such as John Locke who contributed to libertarian theory– have been deeply influenced by it? Although Hayek has never been a big influence on me (I was more influenced by Bastiat, Rand, Leonard Read and the Foundation for Economic Education, and the more pro-feedom type of conservative, such as Frank Meyer and the early William Buckley), I’ve read THE ROAD TO SERFDOM, THE CONSTITUTION OF LIBERTY and some essays, and I don’t recall any of them being Social Darwinist (or what I consider Social Darwinist*) tracts; but it’s been a couple of decades.
*Again, pending my enlightenment.
Thomas Matula Says:
” I am merely pointing out the weaknesses in Libertarianism being faith based instead of logic based.”
…in addition to which, Conservatives and, I believe, Libertarians, use logic better than libs because at least Cons/Libers understand that no group of 500-1000 knuckleheads in D.C. can plan something as complex as an economy.
“Bilwick,
Where have I said I wanted to rule you? ”
Whoa–stop the presses (or the Internet equivalent). Are you saying that you don’t advocate any coercion-based policies? That you are actually–gasp–a libertarian?
If so, this is major. This is like Chris Gerrib coming up with a degree in economics. I don’t think I’m the only one here who has gotten the impression that you are a loyal,dues-paying, party-line regurgitating member of the Cult of the State. If you really have no desire to impose your will by force on the rest of us, you’ve been doing a really poor job of communicating it.
“…Cons/Libers understand that no group of 500-1000 knuckleheads in D.C. can plan something as complex as an economy.”
But, let us note that the fact that they are knuckleheads is not the deciding factor. Even if they were the smartest guys in the world, with centralized economic control, you are dealing effectively with a distributed parameter system with non-colocated feedback. It is inherently non-minimum phase, and impossible to stabilize with sufficient bandwidth to attain maximum prosperity.
…and that stubborn fact is all that holds back the young, modern SWPL leftist – the sane ones know centrally-planned economics ultimately leads to ruin, but they wish it didn’t. Sadly, the desire will remain in subsequent generations long after the history is forgotten.
“…and that stubborn fact is all that holds back the young, modern SWPL leftist – the sane ones know centrally-planned economics ultimately leads to ruin, but they wish it didn’t. Sadly, the desire will remain in subsequent generations long after the history is forgotten.”
Anymore these days, I wonder to what extent the politics of various subgroups of the population is due entirely to temperament. I was reading a history of the Franco-Prussian war the other day, and you could clearly see, in French society of the time, various groups which matched pretty closely to identifiable political temperaments in modern times. There were the traditionalist peasants who wanted Napoleon back because they wanted their national greatness back and a strong hand in European affairs again (sort of conservative). There were the urban collectivist revolutionaries who *hated* the traditionalist conservatives, but they also wanted Napoleon back because they also wanted to overthrow the second republic – they didn’t like democracy at all, and wanted to institute a collectivist state. These guys are so stereotypically leftist, it is scary. In the closing hours of the war, they overthrew the government again, betrayed their armies, and tried to start a communist revolution while their country had foreign armies surrounding Paris. There was a small group of actual liberals (sort of libertarians) who were about the only voice in favor of preserving their democracy and against trying to start a war with the rest of Europe. Unfortunately, like libertarians everywhere else in history, they were never more than 15% of the population.
Looking even further back in history, you have Plato, who was sort of the prototype of the cynical elitist intellectual. He too hated democracy, and regarded central planning by a “benevolent dictatorship” composed of academics and philosopher kings to be the highest form of government. A place for everyone and everyone in their place.
Leftism seems to be an ineradicable bent among certain segments of the population, almost independent of philosophical background or cultural history. It appears to recur in European history again and again.
I was also reading somewhere else about some other revolt in Medieval Germany. There was some sort of religious movement in the city in which some self-styled prophet and his cronies prompted their peasants to rebel against the German princes (don’t get me wrong, these certainly weren’t the good guys, they were cruel evil bastards in their own right). The religious rebels started their own collectivist government, and started pillaging and executing the merchant class of the city. When the city was brought under seige by the royals, the leaders went stark raving mad and instituted their own miniature reign of terror within the city, complete with executions of “enemies of the people” and anyone deemed “insufficiently enthusiastic” about the new regime. They were holding parades in their own honor of starving peasants through the streets as their food supplies dwindled and their walls were being reduced, believing that they only had to believe hard enough for everything to work out.
(Brrrr)
Eventually the german aristocrats broke through and killed everyone. The end.
Bilwick,
I see. Because I dare to ask distributing questions you see me as “the enemy”, a liberal. Does that mean Libertarianism is driven by “group think” as well since you fear the hard questions?
Or is just because its impossible to see the world in any other way then black and white?
Bilwick,
FYI
http://dictionary.reference.com/browse/Social+Darwinism
[[[–noun Sociology .
a 19th-century theory, inspired by Darwinism, by which the social order is accounted as the product of natural selection of those persons best suited to existing living conditions and in accord with which a position of laissez-faire is advocated. ]]]
and
[[[A theory arising in the late nineteenth century that the laws of evolution, which Charles Darwin had observed in nature, also apply to society. Social Darwinists argued that social progress resulted from conflicts in which the fittest or best adapted individuals, or entire societies, would prevail. It gave rise to the slogan “survival of the fittest.”]]]
From the American Heritage New Dictionary of Cultural Literacy.
Two points. First, Social Darwinism doesn’t place humans, nor their organizations, as being beyond natural competition as Karl Marx and other socialists argue. In short, it accepts humans as humans, not reprogrammable robots. Humans will always be competitive and this competition will form the structure of society.
Second, it makes that argument that any interference with natural competition will produce less desirable results in society, and economies. Of course what Socialism is all about is interference with natural competition.
So again, tell me why a Libertarian like YOU dislikes the term so, unless its because you are looking for acceptance of society to be an individual and Social Darwinism has a bad rap…
BTW if you are curious about my economic perspective, its based on Systems Theory and Complexity Economics. This Wikipedia page is as good a description for the layman as any.
http://en.wikipedia.org/wiki/Complexity_economics
So quite honestly I view the Libertarian/Socialist debate as being about as relevant in the 21st Century as the pre-Copernican debates on the structure of the Solar System as Complexity Economics seeks to replace a similar philosophical approach to how economies work with an empirical one on how they actually work.
Now if you figure out how to link your Libertarian philosophy to Complexity Economics you might actually have something that isn’t based on faith.
Bart Says:
>“…Cons/Libers understand that no group of >500-1000 knuckleheads in D.C. can plan >something as complex as an economy.”
“But, let us note that the fact that they are knuckleheads is not the deciding factor.”
Agreed.
Thomas Matula Says:
“BTW if you are curious about my economic perspective, its based on Systems Theory and Complexity Economics. This Wikipedia page is as good a description for the layman as any.
http://en.wikipedia.org/wiki/Complexity_economics
So quite honestly I view the Libertarian/Socialist debate as being about as relevant in the 21st Century as the pre-Copernican debates….”
Even though, according to that very page:
“Complexity economics draws inspiration from behavioral economics, Marxian economics, institutional economics/evolutionary economics, Austrian economics and the work of Adam Smith.[10] It also draws inspiration from other fields, such as statistical mechanics in physics, and evolutionary biology.”
…most of that stuff having been invented long before the 21st century.
Marxian economics eh? Use his notions of what “value” is?
TM also says:
“Now if you figure out how to link your Libertarian philosophy to Complexity Economics you might actually have something that isn’t based on faith.”
I repeat: your logic is wholly based upon faith. Without faith you have no logic. And it has nothing to do with religion.
“Its a mere statement of fact that Libertarianism is a belief system based on faith”
I stopped reading after that. Leaving libertarianism aside, my hope that Mr. Matula could respond rationally was obviously faith-based, but as of now I have lost that faith. I have become an a-Matulist!
Gregg,
Yep, but they didn’t have computers to do the simulations needed for systems modeling in the 19th Century.
And Marxian Economics is different from Marxian politics. It focuses on how commodities are priced relative to cost of production, an element for understanding how markets work. Remember, Karl Marx recognized how markets work in a capitalist economy, but he didn’t like how the winners and losers they selected, which is what socialism is all about, replacing markets with government decision making.
Andrea,
Yes, once again, unable to provide counter arguments you attack the poster. What a closed mind.
“So again, tell me why a Libertarian like YOU dislikes the term so, unless its because you are looking for acceptance of society to be an individual and Social Darwinism has a bad rap… ”
Sort of dense, aren’t you? Re-read my previous posts for my answer. (Particularly May 16, 6:43 am and May 16, 9:34.) This time, feel free to move your finger slowly line by line under each word. Read aloud, if you must. No one’s looking.
(This raises a point of you might remember I raised before about Matula and Gerrib. Are they really as dense as they seem, or is it simply a tactic to avoid points they can’t actually argue? You be the judge.)
One more time: I object to use of the term Social Darwinism as a kind of synonym for libertarianism, or distortion of it as a “sine qua non” of libertarianism. It’s really that simple. You cite these various sources (argument by authority?) , so I’m assuming their descriptions of Social Darwinism are identical to your definition; but you still haven’t shown how the concept is intrinsic to modern American libertarianism, the actual literature and philosophy of which you seem ignorant. Whether that’s a real ignorance, or a feigned ignorance–the better to present a straw man libertarianism for you to fight with–I’m not sure.
The Thomas Aquinas of Crap writes:
“Andrea:
Yes, once again, unable to provide counter arguments you attack the poster. ”
To have a counter argument, there must first be an argument. I haven’t seen anything like an argument (at least not as the term is used in logic) in any of Matula’s posts; at least, not in this thread. Assertions, counter-assertions, citations and quotes; pretty much it.
Bilwick,
“I see. Bilwick,
I see. Because I dare to ask distributing questions you see me as “the enemy”, a liberal. ”
Well, are you or aren’t you? (And of course by “liberal” we mean “State-cultist.”) You seem to object to libertarianism. and since libertarianism is based on a non-aggressive ethic, it seems reasonable to assume that in at least some areas you’re an advocate of coercion. That is, to some extent, you want to impose your will on others by force. But when I asked you–in response to your pose as a rationalist, combatting a faith-based libertarianism–to provide a logical argument to show, then, why you have the right to rule others, you go into this aggrieved”Who? Moi???? Rule others? How dare you” pose.
So then I asked you, Okay, you don’t want to rule others–you’re a libertarian then? And you come back with the non-sequitur response “I see. Because I dare to ask distributing questions you see me as ‘the enemy’, a liberal. ”
So WTF are you then? Bottom line it for us: Do you want to use the coercive powers of the State? If so, on whom, and for what purposes? And by what right? It’s really not all that complicated.
I tell you, good people. this guy is getting to be as big a weasel as Gerrib. If he wants to strike a blow against libertarianism, all he has to do is give a clear reply to questions raised. All of the pro-freedom folks reading this blog will keel over with heart attacks.l
How about bottom-lining “Complexity Economics” for us, too, while you’re at it? I remember you dodging an argument by citing that wikipedia entry before. Will it result in more statism and less liberty then we have now, or less statism and more liberty? Or is this some mumbo-jumbo (as my usually reliable Built-In Statism Detector indicates)where the adherents say, “Oh, we’re really beyond such limited comncepts as ‘liberty” and ‘statism'”–all the while increasing the power of the State?
I for one would like to know the synthesis between Austrian economics and Marxist economics. Is it like a “synthesis” between Vitamin C and strychnine?
“Karl Marx recognized how markets work in a capitalist economy, but he didn’t like how the winners and losers they selected, which is what socialism is all about, replacing markets with government decision making.”
In the process replacing the incentive structure that works so well in the free market with a steaming pile of bovine excrement. As well as other major flaws centralized decision making is subject to. Suggests to me he didn’t understand markets quite so well as his followers claim.
As far as the value of logic, logic is only as powerful and correct as the postulates upon which it operates. When given an incomplete or flawed set of postulates, logical conclusions are similarly limited. Any good Vulcan should know that.
So quite honestly I view the Libertarian/Socialist debate as being about as relevant in the 21st Century as the pre-Copernican debates on the structure of the Solar System as Complexity Economics seeks to replace a similar philosophical approach to how economies work with an empirical one on how they actually work.
Except that complexity economics doesn’t actually invalidate the old views. For example, the Wikipedia page claims that there’s no controller in a complex economic system. However, we already have examples of active control of complex systems (such as the Lorentz attractor). The crude tools of politics or central banks won’t lead to such things as the emergence of periodicity, but they can be used to attempt limited goals (such as wealth redistribution). They’re also generally very big mallets and likely to change complex systems.
Second, socialism may be obsolete, but it is still widespread. Libertarianism and related ideologies are in large part a reaction to the prevalence of socialism practices. Few people are true libertarians, but many people grow concerned when socialism ideals dominate an economy. Until people stop whacking on the “complex economy” with large mallets, I don’t see the need for libertarianism going away.
Finally, complexity economics is about how economies work under prior conditions, while socialism and libertarianism are about how economies should work. In other words, the ideologies are about what rules and conditions your economy has rather than how it behaves. I see that in itself keeping these ideologies from becoming obsolete.
It’s the difference between a proscriptive and descriptive system. That is, given a minimal set of rules, all kinds of markets and institutions will then emerge to deal with problems. To that, one can then add regulations, looking for pareto improvements along the way. Complexity theory can be used to analyze the economy ext post, but it doesn’t provide moral guidance. Those are the premises of any particular society.
Karl,
The star maps, observation and data were the same, just the Heliocentric model provide the first step to better understanding why the Solar System worked the way it does, with Kepler and Newton completing the picture. More important it led to a paradigm shift in how to view the universe, which is what Complexity Economics is doing, recognizing that the models economists borrowed from Newtonian physics are just too simple to work in economics.
Yep, the 20th Century economic philosophies are still wide spread, this blog is evidence of that, but they just become another variable to consider in modeling the working of econsystems.
Yes, philosophies like Socialism and Libertarianism are about how economics SHOULD work, just like Aristotle Physics was about how the Universe SHOULD work. The paradigm change of the Copernican Revolution, continued by Kepler and Newton replacing should with how, how does it actually work.
That is the paradigm change of Complexity Economics, looking at how econsystems actually work in the real world as dynamic complex systems. And the promise of it is being able to use the principles discovered to develop better economic policies by understanding how they will actually impact the econsystem.
For example the current economic mess appears to be the result of four factors that had major impacts on the American econsystem.
1. The Clinton Administration’s deregulation of the banking industry
2. The Bush Administration’s doing major tax cuts during the war of terrorism and invasion of Iraq. If you are going to do a war you need to make sure you have the tax revenues to pay for it, just as was the case in WW I, WWII and the first half of the Cold War.
3. The creation of a major capital gain tax break that encouraged individuals to buy homes to flip every two years, distorting the housing market.
4. The failure, at Alan Greenspan’s insistence, of the SEC to regulate derivatives allowing risk to accumulate like steam pressure in a closed off boiler.
These factors combined to create the housing bubble that burst in 2007 crashing the entire Econsystem. In terms of Complexity Economics a good biological analogy would be when constraints, like predators, are removed on a species like Deer so the population explodes and devastates its ecosystem resulting in a crash. In this sense then the bailout was like good meaning folks taking hay to feed the deer instead of releasing wolves to feed on them. Even better would be not taking the wolves away (messing with the system) in the first place so they are able to control the population naturally.
The take away is that economic policies that benefit one group usually harm the entire system. So just like you should be very careful about how you mess with a natural ecosystem you need to be care how you mess with an econsystem.
Now will this have an impact on policy in Washington? Probably not because it requires doing unpleasant things, like eliminating industry specific tax breaks, refocusing regulation on increasing competition and linking bailouts to breaking up of firms into units small enough to fail, then making sure they don’t reform into mega size firms to fix the problem. Since these actions violate the ideologies of different political groups they will never happen.
Bilwick,
I thought the Wikipedia was fairly simple, but to make it more simple, Complexity Economics is about replacing wishing thinking by philosophers of how economies should work with empirical research on how they actually do work in the real world.
And in terms of politics I am a Reagan Republican who voted for Senator McCain. So don’t blame me for President Obama’s policies. Blame those who choose to sit on the sidelines and not take part in the election.
No, the blame is properly laid at the feet of those who actually vote for people like Obama and Harry Reid… oh wait…
For example the current economic mess appears to be the result of four factors that had major impacts on the American econsystem.
1. The Clinton Administration’s deregulation of the banking industry
2. The Bush Administration’s doing major tax cuts during the war of terrorism and invasion of Iraq. If you are going to do a war you need to make sure you have the tax revenues to pay for it, just as was the case in WW I, WWII and the first half of the Cold War.
3. The creation of a major capital gain tax break that encouraged individuals to buy homes to flip every two years, distorting the housing market.
4. The failure, at Alan Greenspan’s insistence, of the SEC to regulate derivatives allowing risk to accumulate like steam pressure in a closed off boiler.
Ah, I don’t see the connection above to complexity economics here. This looks more like Thomas Matula’s opinions. I see four missing aspects. First, it doesn’t list the Fed’s easy credit, the near guarantee of bailouts (globally, not just in the US!) for the businesses taking these risks (particularly, the Fannie Mae/Freddie Mac situation), or the 50 to 1 or worse leverage on real estate securities (which aren’t just “derivatives”) which were perceived as being far safer than they turned out to be (at the least, point 4 needs to be far more nuanced). Last but not least, this was a global not national disaster. For example, a big contributor would have been the liberalization of much of the European housing market.
Point 2 above seems completely irrelevant. Glancing at debt over this time period (FY 2001-2007), the increase in US debt per GDP wasn’t that significant. That debt didn’t really start moving up until the actual crash of major financial institutions in late 2008. Then we have TARP, ARRA, QE, and other major expenditures since with a vast jump in total debt (and total publicly held debt) per GDP over the past three fiscal years.
I believe the easy credit from the Fed and other central banks was the primary driver for the real estate move. As I understand it, residential real estate was strongly affected while commercial real estate was less so and other capital investments such as stocks showed little effect. That indicates to me that it wasn’t just changes in taxation of capital gains, but something particular to residential real estate. Glancing at the Bush tax cuts on Wikipedia, I don’t see anything that specifically targeted residential real estate compared to other investments, but I’m not knowledgeable in this area.
As a final note, I don’t see anything in the above discussion that invalidates the idea of complexity economics. But without some sort of working model of the global economic system, it reduces to opinion, mine versus yours.
Titus,
If the Tea Party hadn’t hijacked the primary Harry Reid would not be a Senator today. Fortunately the Nevada Republicans have taken the steps necessary to make sure they don’t hi-jack any more major elections here.
Karl,
[[[Point 2 above seems completely irrelevant. Glancing at debt over this time period (FY 2001-2007), the increase in US debt per GDP wasn’t that significant.]]]
But during a boom the debt should be going down, not up.
The House Exclusion was part of the Republicans Taxpayer Relief Act of 1997 which Newt Gingrich counts as one of his major accomplishments.
http://money.cnn.com/magazines/moneymag/moneymag_archive/1997/08/01/229754/index.htm
HOW A CAPITAL-GAINS CUT WILL CHANGE THE WAY YOU INVEST
Basically ti turns homes from places to live into machines to make tax free money, with the consequences we see today.
And yes, Alan Greenspan’s loose monetary policy was another contributing factor, but not the major one.
I see. The “blame” is conveniently flexible — sometimes we can blame the electorate, sometimes they are blameless because the “Tea Party made them do it!” Got it.
Karl,
In terms of the bank regulation, the specific reference is to the Gramm–Leach–Bliley Act of 1999.
It broke down the firewall that was placed between commercial banks, investment banks, securities firms and the insurance industry in the Great Depression, the lack of which help create it, and allowed the creation of the mega-finance firms like AIG that were “too big to fail” that the federal government needed to bail out with TARP.
Without the Gramm–Leach–Bliley Act of 1999 the firewalls would have stayed in place. Mega-financial firms would not have been allowed to be created and the existing firms would have been small enough to go under without taking the economy with them, as was the case with the Savings & Loan crisis in the 1980’s.
The Commodity Futures Modernization Act of 2000 pushed by Larry Summers and Alan Greenspan then eliminated any regulation of derivatives as long as they were not traded on exchange, creating a free and open market for the mega finance firms to play in and which was the specific trigger of the collapse. And since they were now too big to fail….
So to sum it up, it was the disassembling of the regulatory authority in the finance industry that existed since the Great Depression that created the Great Recession. In short you tool the constraints off the same thing happened that happens with you take the constraints off a wild population like Deer. And by feeding the starving deer (TARP) instead of shooting them we have set things up for a repeat of the cycle.
Thomas, you said “too big to fail” several times. That wasn’t on the list of your causes for the current economic downturn. Second, I consider the Fed’s easy money and the Fannie Mae/Freddie Mac advantages to be decisive factors more important than the capital gains changes.
HOW A CAPITAL-GAINS CUT WILL CHANGE THE WAY YOU INVEST
Basically ti turns homes from places to live into machines to make tax free money, with the consequences we see today.
Second, Thomas, you cite the wrong capital gains cut (this one, if it happened, dates from Clinton’s term not Bush’s). Again, as I remarked earlier, there were a number of venues for where capital gains could be an advantage. Why was residential real estate favored?
Without the Gramm–Leach–Bliley Act of 1999 the firewalls would have stayed in place. Mega-financial firms would not have been allowed to be created and the existing firms would have been small enough to go under without taking the economy with them, as was the case with the Savings & Loan crisis in the 1980′s.
So what was the problem? I don’t see a reason for the firewalls even in the lee of this recession. To be honest, I like removing restrictions like this because it results in business innovation. Nor is there such thing as “too big to fail.” You also ignore the high leverage that these institutions were allowed to have.
Karl,
Nope, I never said the housing cut was during President’s Bush’s Administration. Read number 3 again, it doesn’t mention President Bush.
President Bush’s major mistake was cutting tax rates again while involved in a very expensive war. He should have raised them enough to counter the costs so the balance budget deal worked out with the Tax Relief Act of 1997 would have continued to work and the U.S. would have continued to have surpluses instead of deficits.
Also please detail the difference in Fannie Mae and Freddie Mac mortgage procedures before 1999 and post 1999 that lead to the boom.
[[[Nor is there such thing as “too big to fail.” You also ignore the high leverage that these institutions were allowed to have.]]]
Both were a result of the Gramm–Leach–Bliley Act of 1999 and when an organization gets so big its failure crashes the economy because ordinary folks not longer have access to their money, because banks stop lending, etc. then yes, it is too big to fail and should have never been allowed to exist.
There was a reason, based on hard experience in the Great Depression that the government built firewalls between those institutions. We learned that lesson again in 2008.
Also please detail the difference in Fannie Mae and Freddie Mac mortgage procedures before 1999 and post 1999 that lead to the boom.
Greatly expanding the use of REITs. Where’s your model BTW? I don’t have one either, but I just follow the money and the expectations. That seems to work.
The expansion of REITs were a result not a cause as investors were chasing the bubble.
The researchers in the field are developing the models, I apply the principles to looking at business strategy and behavior.
The expansion of REITs were a result not a cause as investors were chasing the bubble.
“Chasing the bubble?” Ah, you mean chasing easy Fed credit. One of the points you neglected to include in your list. What is your interpretation of events based on? What’s the model?
Karl,
As I noted earlier easy credit by the Fed covers everything in the economy, not just mortgages, so it yes, it contributed to the boom. But was not an unique event like the others. The Fed has been tightening and easing credit for decades, that’s called monetary policy, although Alan Greenspan’s free market beliefs did make him slower to tighten it than most.
As I noted earlier easy credit by the Fed covers everything in the economy, not just mortgages, so it yes, it contributed to the boom. But was not an unique event like the others.
And due to the large impact of the Fed and its decisions, it didn’t need to be unique (although at the time the Federal Funds Rate from 2002-2005 was the lowest it had been since 1960). Central bank policies would have lead to some sort of bubble.
Looking at your supporting evidence for point 3, I agree that the Clinton-era capital gains cut (which has a special, fairly large exemption for selling a home) was probably a big factor. But the other items don’t seem that significant.
As I see it, your opinion is focused on the US even though this recession was global and worse in a number of countries than it was in the US. Second, you seem obsessed with the regulatory aspect of banking, ignoring that large bubbles require money and a prolonged distorting of reality to survive.
That money can come from banks, but it doesn’t have to. Maybe the regulatory changes that lead to US banks mixing their various activities hurt, but there would have been a vast amount of money, including bank money, in real estate anyway, directly or indirectly.
Finally, when you argue your side, you keep mentioning factors that you had ignored at the start, such as “chasing the bubble,” Fed easy credit or “too big to fail,” the promise of government intervention, if things went bad. To be honest, I don’t think you’ve thought this out very well.
Karl,
I listed the key ones which were unique in both creating the bubble that failed as well as creating the high national debt that limits how the U.S. was able to respond. You know this is a DB, not a academic paper so I am limited on going into detail.
However, if you check on the economic problems with the other countries you will see they trace back to the U.S. which started the ball rolling. When an economy that accounts for a fifth of the global GDP goes bad it tends to make economic issues in other countries worst.
I listed the key ones which were unique in both creating the bubble that failed as well as creating the high national debt that limits how the U.S. was able to respond. You know this is a DB, not a academic paper so I am limited on going into detail.
So no other recession has resulted from removal of regulatory shackles? No other US administration has ever borrowed a lot of money? I don’t see the uniqueness.
I don’t think we need to get into academic level detail here to ponder what you are claiming. My view is that this recession is not unusual even in its severity.
Here’s my view. The business cycle is fundamentally based on expectation, what people think things are worth. The conditions for a bubble and burst occur when a population perceives the value of some as first being much greater than it was, then subsequently less valuable than it was before the burst. It is a combination of incomplete knowledge about the future and aggregate behavior, frequently with irrational components mixed in. The size of the bubble depends on available funds, usually from parties that have for a time nearly discounted risk or who have little control over the money.
So what do I consider factors which contribute to a bubble/burst behavior? First, things which change the early perception of the value of the good in question. For example, the Clinton-era capital gains cut aided home sellers in particular, significantly increasing the value of any home which had appreciated by sell time.
Second, I need to emphasize the role of REITs in this. These contributed in two ways. First, they expanded the pool of investors to anyone who could buy the security. That means more fuel for the fire. Second, their risks were poorly understood, especially, the actual pool risk and the systemic risk from mass default. Such skewed understanding contributed to the bloated expectations about what these financial instruments did.
Also, because of the perceived conservative nature of real estate investments, various parties were allowed to leverage REITs and other real estate investments to a staggering 50 to 1 (50 borrowed dollars for every dollar of assets) ratio. I don’t know what the derivatives market had for leverage, but I’d be very surprised if a US company were allowed leverage of this degree, due to the uncertainty of general derivatives.
Third, you had the two real estate giants, Fannie Mae and Freddie Mac with vague but heavily valued (again, optimistic expectations) federal guarantees. And the Fed pumping funds. How badly would the recession be if the Fed had kept interest rates higher precisely to combat the growing bubble in housing? I think we’d be a lot better off, probably will a mild recession in the 2002-2005 period, but nothing serious like 2008-2009. That says to me that the Fed was a huge factor in the recession, as expected.
So you had entities with vast leverage, a poorly understood financial instrument in a field that was growing, and a vast pool of cash from the Fed and semi-public businesses to feed the flames. We didn’t need any change in banking regulation to get one of the largest recessions we had ever seen since the Great Depression.
So to consider your points again, point 1 doesn’t make sense. The recession didn’t start with banks and many of them would have fallen anyway due to their near universal dependence on real estate loans and in some cases connections to foreign banks. Point 2 remains irrelevant. TARP wasn’t hindered by the modest increase in federal debt, it was hindered by being a wholly inappropriate response.
Point 3 was relevant as I have mentioned above. Point 4 is not since derivatives in general didn’t trigger the recession nor were they widespread like REITs. So most of your “unique” aspects, even when just restricted to the US portion of the recession, were irrelevant. We also ignore that some parts of Europe had their own real estate booms and these would have ended badly anyway, probably to the point of triggering the US recession were they to occur first.