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Libertarians, deregulation, and the current economic crisis.





OpposableThumbs
I could use some comedy in my life, so I'm asking how American libertarians and republicans who want less government regulation are justifying the complicity of their philosophy in the present economic crisis. Let me put it simply: The U.S. did not regulate its own financial industry (google SEC oversight failure), which then invented stupid and exploitative mortgages, which destabilized the real estate industry, which in turn destabilized the world economy. Perhaps the problem can be solved by just getting rid of the SEC and financial industry regulation altogether?

The first respondent who says "just some more Bush bashing by the liberal establishment" instead of giving a cogent and reasoned answer will win a kewpie doll. It's a cliche, boring, and evasive response.

Have a nice day.
ocalhoun
Bank and financial service regulation may very well be one of the few things we are forced to accept regulation of. Sadly, banks cannot be trusted to figure out that their long-term success depends upon sound business practices and self-discipline, not flashy month-to-month growth figures.

Because they show a destructive lack of self-discipline, they need to be disciplined by someone else, and the only one with enough power to do so is the government.

Even this regulation, though, needs to be kept to a minimum that will ensure that banks and financial institutions will not self-destruct in ways that cause severe damage to the rest of the economy. This regulation should be enforced as efficiently as possible, minimizing government involvement and minimizing the size of the regulating agency. This regulation should probably be funded by the banks and financial institutions themselves, via fees for 'banking licenses' and such.

Is that so unreasonable?
jmi256
OpposableThumbs wrote:
I could use some comedy in my life, so I'm asking how American libertarians and republicans who want less government regulation are justifying the complicity of their philosophy in the present economic crisis. Let me put it simply: The U.S. did not regulate its own financial industry (google SEC oversight failure), which then invented stupid and exploitative mortgages, which destabilized the real estate industry, which in turn destabilized the world economy. Perhaps the problem can be solved by just getting rid of the SEC and financial industry regulation altogether?

The first respondent who says "just some more Bush bashing by the liberal establishment" instead of giving a cogent and reasoned answer will win a kewpie doll. It's a cliche, boring, and evasive response.

Have a nice day.


What would more regulation actually do? I’ve seen this call for “more regulation,” but without any clear communication of what that means. I would argue that some (but not all) of the factors leading to the current crisis are actually caused by overregulation. For example, Democrats routinely insisted that mortgages be provided to low-income and bad-credit candidates to appease their voting blocks, even though the market said they were bad risks and would not have provided loans without the Democrat overregulation.

If left alone, markets behave pretty efficiently. Before we decide that a free market doesn't work, we should actually have a free market that is to function without the burden of overregulation (especially the type that is politically motivated).
Bikerman
Err...I think this is a fallacy.
The markets were deregulated well over a decade ago. One consequence was that banks could lend far more than they actually had in assets from savers. Bad move.
Another consequence of deregulation was the creation of very complex financial instruments which allowed the bundling of risky debt with secure debt and allowed that new 'instrument' (complex 'structured securities') to be categorised (by people essentially employed by the firms responsible) as AAA rated (ie the safest possible).
Combine those two 'relaxations' of control and you get what we currently have - a credit meltdown where nobody knows what such financial instruments are actually worth, how much they stand to loose, and therefore how much they can afford to trade/lend.
A decent regulatory framework would have avoided the current situation. To say that the current credit crisis is a result of too much regulation is, I'm afraid, completely contradicted by the facts.
ocalhoun
Bikerman wrote:
To say that the current credit crisis is a result of too much regulation is, I'm afraid, completely contradicted by the facts.

Completely contradicted? Perhaps not. There was an excess of bad regulation and a lack of good regulation.
Bikerman
ocalhoun wrote:
Bikerman wrote:
To say that the current credit crisis is a result of too much regulation is, I'm afraid, completely contradicted by the facts.

Completely contradicted? Perhaps not. There was an excess of bad regulation and a lack of good regulation.
Err...to support that contention you would have to give an example of bad regulation. Can you?
The idea that the market will always 'sort itself out' is attractive and will, in the long term, generally work. The problem is that when the market makes tragically wrong decisions, such as with the current financial situation, the 'sorting out' means devastation to ordinary people. Sure, we could let banks go belly-up and damn the consequences - eventually the more 'fit' banks would survive and continue. In the meantime, however, industry would be devastated, unemployment would be horrendous, repossessions would spiral and life would be very grim indeed.....
Markets need regulation - they are not an end in themselves, they are means to an end.
jmi256
Bikerman wrote:
Err...to support that contention you would have to give an example of bad regulation. Can you?


I don't mean to usurp ocalhoun argument, but here is an interesting piece from the Ayn Rand Institute that makes the argument that overregulation contributed to the crisis.

To answer Bikerman's question: The article points out "...the Fed keeping interest rates below the rate of inflation, thus encouraging people to borrow and providing the impetus for a housing bubble; the Community Reinvestment Act, which forces banks to lend money to low-income and poor-credit households; the creation of Fannie Mae and Freddie Mac with government-guaranteed debt leading to artificially low mortgage rates and the illusion that the financial instruments created by bundling them are low risk; government-licensed rating agencies, which gave AAA ratings to mortgage-backed securities, creating a false sense of confidence; deposit insurance and the “too big to fail” doctrine, whose bailout promises have created huge distortions in incentives and risk-taking throughout the financial system..."

The full article is below:

Quote:

Stop Blaming Capitalism for Government Failures
By Yaron Brook and Don Watkins

Speaking of the financial crisis, French president Nicolas Sarkozy recently said, “Laissez-faire is finished. The all-powerful market that always knows best is finished.”

Sarkozy was echoing the views of many, including president-elect Obama, who assume that the financial crisis was caused by free markets--by “unbridled greed” unleashed by decades of deregulation and a “hands off” approach to the economy. And given this premise, the solution, they say, is obvious. To solve this crisis and prevent another one, we need a heavy dose of Uncle Sam’s elixir: government intervention. Whether it’s more bailouts, stricter regulation, a new round of nationalizations, or some other scheme, the only question since day one has been how, not whether, government is going to intervene.

And the issue is wider than the financial crisis. Millions of Americans don’t have health insurance? Well, says Obama, that’s because we’ve left the health-care system to the free market. The solution: a complete government takeover of medicine. A few companies engaged in accounting fraud? It must be because we didn’t impose enough regulations on businessmen. The solution: rein in corporations with Sarbanes-Oxley.

But while capitalism may be a convenient scapegoat, it did not cause any of these problems. Indeed, whatever one wishes to call the unruly mixture of freedom and government controls that made up our economic and political system during the last three decades, one cannot call it capitalism.
Take a step back. In the lead up to the “Reagan Revolution,” the explosive growth of government during the ’60s and ’70s had left the American economy in disarray. A crushing tax burden, runaway inflation, brutal unemployment, and economic stagnation had Americans looking for an alternative. That’s what Reagan offered, denouncing big government and promising a new “morning in America.”
Under Reagan, some taxes were reduced, inflation was subdued, a few regulations were relaxed--and the economy roared back to life. But while markets were able to function to a greater degree than in the immediate past, the regulatory and welfare state remained largely untouched, with government spending continuing to increase, as well as some taxes. Later administrations were even worse. Bush Jr., often laughably called a champion of free markets, presided over massive new governmental controls like Sarbanes-Oxley and massive new welfare programs like the prescription drug benefit.

None of this is consistent with capitalism. As the economic system that fully recognizes and protects individual rights, including the right to private property, capitalism means, in Ayn Rand’s words, “the abolition of any and all forms of government intervention in production and trade, the separation of State and Economics, in the same way and for the same reasons as the separation of Church and State.” Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy. The government’s job under capitalism is single but crucial: to protect individual rights from violation by force or fraud.

America came closest to this system in the latter half of the nineteenth century. The result was an unprecedented explosion of wealth creation and consequent rise in the standard of living. Even now, when the fading remnants of capitalism are badly crippled by endless controls, we see that the freest countries--those which retain the most capitalist elements--have the highest standard of living.
Why then should capitalism take the blame today--when capitalism doesn’t even exist? Consider the current crisis. The causes are complex, but the driving force is clearly government intervention: the Fed keeping interest rates below the rate of inflation, thus encouraging people to borrow and providing the impetus for a housing bubble; the Community Reinvestment Act, which forces banks to lend money to low-income and poor-credit households; the creation of Fannie Mae and Freddie Mac with government-guaranteed debt leading to artificially low mortgage rates and the illusion that the financial instruments created by bundling them are low risk; government-licensed rating agencies, which gave AAA ratings to mortgage-backed securities, creating a false sense of confidence; deposit insurance and the “too big to fail” doctrine, whose bailout promises have created huge distortions in incentives and risk-taking throughout the financial system; and so on. In the face of this long list, who can say with a straight face that the housing and financial markets were frontiers of “cowboy capitalism”?

This is just the latest example of a pattern that has been going on since the rise of capitalism: capitalism is blamed for the ills of government intervention--and then even more government intervention is proposed as the cure. The Great Depression? Despite massive evidence that the Federal Reserve’s and other government policies were responsible for the crash and the inability of the economy to recover, it was laissez-faire that was blamed. Consequently, in the aftermath, the government’s power over the economy was not curtailed but dramatically expanded. Or what about the energy crisis of the 1970s? Despite compelling evidence that it was brought on by monetary inflation exacerbated by the abandonment of the remnants of the gold standard, and made worse by prices controls, “greedy” oil companies were blamed. The prescribed “solution” was for the government to exert even more control.

It’s time to stop blaming capitalism for the sins of government intervention, and give true laissez-faire a chance. Now that would be a change we could believe in.


Source = http://www.aynrand.org/site/News2?page=NewsArticle&id=21923&news_iv_ctrl=2702
deanhills
Problem is that none of this has to do with the real cause of the problem. Which is to have allowed for a credit bubble to occur by not enforcing regulations that had already been in place and should have prevented the problem from occuring in the first place. For example in England money has been given to the Banks to bail them out, and I can imagine with that there has been placed very stiff compliance rules as well as compliance officers appointed to oversee the process, but I still have not seen greater effort from the banks to assist small business for example with loans to bail them out, which I thought the original intention had been for bailing out the banks. Some of the small businesses of course may have bad management in place, but others, like in the construction industry, may have had cash flow problems, and temporary and immediate short-term assistance would have been very helpful here. But how can Government really help with business when they are not really created for doing business?

What I am trying to say is, with regulation comes responsibility to enforce, and the credit bubble was allowed to develope and thrive when there had already been regulations available that should have checked and stopped the credit bubble from growing, and it did not do that because both Government with its regulations and BIG business were not vigilant and were giving all kinds of speeches about a new economy that is happening in place of that. So who is to say that this new set of regulations and bailing out banks are going to help the rest of the economy? It may make the books look good, but unemployment is rising very fast, companies are going down fast. The money to the banks aren't getting to the people who really need it, and also not expeditiously. I still think it would have been better to let those banks who were really guilty with not having followed the existing regulations to the point of fraudulent practices, to have gone under and to let business in consortium with banks work with Government regarding regulations and loans, instead of from Government to banks only.
ocalhoun
jmi256 wrote:

I don't mean to usurp ocalhoun argument,
Quote:

It’s time to stop blaming capitalism for the sins of government intervention, and give true laissez-faire a chance. Now that would be a change we could believe in.


Usurp all you want; you put a lot more effort into the reply than I was planning on.

Completely unregulated financial services would not be a solution though. It would if they could be bothered to think in the long term, but modern corporations are absolutely unable to do so.
Whatever makes the stocks go up this quarter is what will be done, no questions asked. Next quarter? The next 5 years? The next century? They'll worry about those when they come. Largely because of their shortsighted greed, independent regulation is a necessary evil, though that regulation should still be kept to a minimum.
deanhills
ocalhoun wrote:
Completely unregulated financial services would not be a solution though. It would if they could be bothered to think in the long term, but modern corporations are absolutely unable to do so.
Whatever makes the stocks go up this quarter is what will be done, no questions asked. Next quarter? The next 5 years? The next century? They'll worry about those when they come. Largely because of their shortsighted greed, independent regulation is a necessary evil, though that regulation should still be kept to a minimum.


Agreed. And that is sad. The banks were bailed out with the first package of 350billion with the understanding that they will use the money to bail out people in the street. So that was the general understanding when they had been given the money, and probably at the time it had not been felt necessary to legislate this with a string of regulations. But perhaps Obama will now have to do that. Totally agreed with shortsighted greed. This is probably what it is really about. On the other hand, perhaps the banks have a certain duty to their shareholders and even when the money was given to them with a specific focus of circulating it, they are still focussed on making profits and showing a good bottomline to their shareholders. Probably an art to get the right balance and still keep capitalism alive and thriving.
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