You can't lend money if you don't have it. And beginning in 2001, the Federal Reserve made sure lots of people had it. In January 2001, when President Bush took office, the federal funds rate, the key benchmark for all interest rates in this country, was 6.5 percent. Then, in response to the meltdown in the technology sector, the Fed began cutting the rate. By August 2001, it was at 3.75 percent. And after the terrorist attacks of September 11, the Fed opened the spigot. By the summer of 2002, the federal funds rate was 1 percent.
No mention of the reason for the low rates i.e. to spur economic growth. The administration wanted to PROVE that tax cuts cause enough economic growth to grow government revenue. The way to do that if the tax cuts aren't really working is to keep lowering the interest rate. Now that the whole house of cards has fallen down, it is very silly to be saying that less government would be the solution.
I would say that in June of this year I was a hardcore libertarian, and I have been pretty much since I had become politically aware, but after digging through the events and the economics of the crisis, my mind has changed. When it comes to financial markets, they are going to swing. But government's role should be to force publicly traded companies to have transparent books, and the financial industries where anything but transparent in the last few years. A stronger SEC would have helped in that regard.
When a company engages in systemic risk, it discounts that risk by the amount of the system the company doesn't occupy (e.g. if Goldman does something that will create a 10% chance of a $100 billion dollar loss, spread evenly across the financial industry as a whole, and if Goldman only makes up 5% of the industry, Goldman will only take into consideration a 10% chance at a $5 billion loss. The other $95 billion isn't their problem and their shareholders could sue members of the board if the board allowed the company to take it into account).
Superbly written, and a sobering read. As a proponent of small government, the ideas themselves are echoes, but I appreciate the wealth of evidence provided.
The big governments of the past sixteen (or, arguably, eighty) years have provided quite a bit of ammunition for political conservatives, and this spiraling crisis to me resembles an endgame for big government. Its bloat and poor decisions will result in bankruptcy and a timely education for those who've forgotten that the US government is inherently inefficient. This inefficiency is by design, for fear of a hulking administration was the primary motive in drafting such a constitution.
Or, this will become a runaway train, and the government will grow like a cancer til its collapse. Let's hope not.
Wow, that's a terrible article, short on facts and long on ideology.
The vast majority of the subprime mortgages doled out were never sold to Fannie or Freddie -- they were bought up eagerly by investment banks who had lax leverage requirements. Many of these mortgages were originated by in-house origination units, so, yep, they knew what they were doing.
Blaming government regulation and lending to low-income borrowers for the financial crisis is like blaming the janitor at JPL for the Challenger exploding.
I don't see how you can be a libertarian these days while addressing the current financial crisis without presenting some kind of rebuttal to the commonly held view that it was the do nothing (aka libertarian) government that was responsible for prolonging the Great Depression. Also, the lack of regulation coming into the current crisis allowed banks to take on much more risk then they should have. Overall, it is not clear what solution this article is proposing.
The case has been made, many times, by many economists of a variety of political leanings. Don't forget that the longest and deepest depression in US history was accompanied by the largest expansion of government power in US history, which was ineffective.
FDR greeted a collapse in the money supply with measures designed to keep the price of labor and food high. Unsurprisingly, shortages in jobs and food lasted a long time.
In my experience, most people that think FDR "saved us" from the Great Depression got a history education from government schools and never studied Economics.
The "do-nothing" Hoover administration was also very activist, to boot.
If it's on reason.com, you don't even have to look at the article. The answer will always be "less government, more free market". They're boringly and religiously predictable, just like some people on the left always call for "the government" to step in and (magically?) fix everything. I think neither one is particularly intellectually stimulating and the ensuing debates have been acted out a million times on the internet.
Anyone who says they know exactly what went wrong with the current crisis and exactly how it should have been done is full of it, IMO. I think it will be years before all the facts have been digested enough to get a good idea of what really happened.
One inconvenient discussion the article leaves out is anything related to this:
"8. The critical deregulatory mistake was allowing excess leverage. Many deregulations get blamed but in fact contributed little to the problem."
They mention it with fannie and freddy, but don't mention it at all with regards to the big investment banks, which got an ok from the SEC to increase their leverage.
I don't doubt that bad regulations played a role in the problems, but attributing all the problems to the government strikes me as being simplistic, and an argument based more on faith than facts. Which was my original point about reason.com.
Anyone who says they know exactly what went wrong with the current crisis and exactly how it should have been done is full of it, IMO.
This is the kind of rule that works until it doesn't. Seems better just to judge each explanation (of this or anything else for that matter) on its merits. And the place to start is with some specific thing the article says that you believe is false.
People are still debating the great depression, for that matter, so my expectations are that any debate here will simply go the way of typical libertarians vs the rest discussions that one finds all over the internet, rather than adding anything particularly new or interesting. There is a lot that we don't know - who knows what sorts of information will come out over the years from people like Paulson, Bernanke, those at the helm at Bear, Lehman, AIG, and so on. We're still in the middle of this and won't see the end of it for a while, so I really don't think we know enough to draw accurate conclusions. The fact that it's even a recession was only officially declared last week.
That said, I think the problem with the article is one of omission: he points out some regulatory issues, but is blind to the fact that the market screwed up in a lot of ways too:
* He barely mentions the ratings agencies, and how badly they got things wrong, the fact that they were being paid by the same people whose risk they had to rate, and some of what has emerged about how they operated.
* He seems to gloss over the fact that securitizing mortgages without a requirement for whoever is selling on the mortgage to keep some 'skin in the game' is a recipe for market failure.
* He only mentions excessive leverage for Fannie and Freddie. Not even discussing that for banks is indicative that he's simply out to push his point, rather than take a broad, ideologically neutral look at what went wrong.
* He talks about temporary easing of capital requirements. Libertarians like to point out that once the government gains some power, it's hard to get it back. I think the reverse is often true as well - 'temporary' measures become permanent due to lobbying and pressure not to let anyone fail. Perhaps it might have helped, though, but how and when to make those measures go away is a complicated subject in its own right.
* In terms of the bailout, it certainly appears that there are lots of dodgy aspects to it, but it's not like you can back up and run these things 10 different ways to see what works best. I think some of his criticism is sound, but perhaps other approaches would have been worse - it's simply impossible to say. Doing nothing (the real "keep the government out of it" plan) wasn't really an option due to the systemic risk.
* I do agree with his hope that we don't overregulate, but don't think we should fight any regulation, just look for sensible things that will 1) continue to allow financial innovation, but 2) patch up some of the problems with this round of things, and attempt to make future bubbles and busts a bit less drastic. They'll happen just the same, but I view people as basically "muddling through" in terms of the economy. It's too big and complex and vulnerable to new ideas and irrational exuberance to either regulate away all problems (at least without killing off a lot of what's good), and at the same time I don't believe in throwing up our hands in the air and saying "oh, the free market will take care of everything" - there are plenty of ways the market can fail, too.
>>which got an ok from the SEC to increase their leverage.
Agreed. But it isn't "deregulation" to give only the 5 largest investment banks (which were systemically important) an exemption to leverage rules governing all other banks -- that's regulatory corruption.
Also, the private i-banks levered up to 30-1, but fannie and freddie went to 130-1 (they may be actually be more leveraged now that they are under government control). And the Federal Reserve is levered over 55-1 today.
> Anyone who says they know exactly what went wrong with the current crisis
The primary cause boils down to monetary policy. Financial panics are not new. There have been many, and they were all caused by credit bubbles. Regulatory details and the exact nature of the scams run during the bubble are quite secondary.
I have heard this a lot, and I'd like the other side to chime in: have there been any bubbles that happened while interest rates and the money supply were generally decreasing? Lots of people dismiss your view, but such a bubble would be strong evidence that they're actually right.
I guess it's hard for those literate on the subject of the depression to realize anybody out there still fails to understand it was a direct product of Hoover and FDR's economic interventionism. Hoover's strong policy reaction to the crash and then the New Deal caused the Depression. It ended after the war because the government was forced to roll back much of the New Deal in order to win the war.
Countries that did not much intervene after the initial financial crash recovered in the space of a few years. The decade long depression was more of an American phenomenon caused by FDR.
You can't lend money if you don't have it. And beginning in 2001, the Federal Reserve made sure lots of people had it. In January 2001, when President Bush took office, the federal funds rate, the key benchmark for all interest rates in this country, was 6.5 percent. Then, in response to the meltdown in the technology sector, the Fed began cutting the rate. By August 2001, it was at 3.75 percent. And after the terrorist attacks of September 11, the Fed opened the spigot. By the summer of 2002, the federal funds rate was 1 percent.
No mention of the reason for the low rates i.e. to spur economic growth. The administration wanted to PROVE that tax cuts cause enough economic growth to grow government revenue. The way to do that if the tax cuts aren't really working is to keep lowering the interest rate. Now that the whole house of cards has fallen down, it is very silly to be saying that less government would be the solution.
I would say that in June of this year I was a hardcore libertarian, and I have been pretty much since I had become politically aware, but after digging through the events and the economics of the crisis, my mind has changed. When it comes to financial markets, they are going to swing. But government's role should be to force publicly traded companies to have transparent books, and the financial industries where anything but transparent in the last few years. A stronger SEC would have helped in that regard.