Thursday, October 16, 2008

Don't Blame Capitalism: Government Policies Undermined Markets, Promoted Reckless Behavior

Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.

For the political left, which has long championed the need for such limits, this crisis is the opportunity of a lifetime.

Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.

~Peter Schiff in today's Washington Post

16 Comments:

At 10/16/2008 4:19 AM, Blogger Arman said...

yeah right! Allowing banks to create money on 100% of collateral was a RELAXATION of the banking rules that were in place, was it NOT? The banks wanted that interest! They THOUGHT that real estate could not devalue! Their business practice was based on faulty assumption and lax regulation. Borrowers will always borrow as much as they can from the bank. It is the bank's business practice that constrict loans, and not ever the prudence of the general population.

 
At 10/16/2008 5:28 AM, Anonymous Anonymous said...

C'mon Mark, don't be hating on the government for not being the kind of nanny your hindsight fantasizes about.

 
At 10/16/2008 12:06 PM, Anonymous Anonymous said...

Schiff is an Austrian - the school of economics that saw this bust coming and repeatedly point out that the Fed, the GSEs and the ratings agency cartel are NOT free market entities. The question is, why don't other free-marketeers ever point this out? Why do they think socializing the supply of money is going to lead to good results? Has it not been proven false time and time again? Do we really need a complete collapse of our economy before it's realized that we need to return to sound money?

 
At 10/16/2008 12:15 PM, Blogger like such as said...

Arman

Sure banks wanted it, but only because they knew F&F would be there to buy the crappy mortgages from them. Their business practice was indeed based on faulty assumptions, but is it so far-fetched to say that those assumptions were not "their" own, but those of the government?

I put "their" in quotations, because, unlike the governemnt, all banks do not operate under the same decisions. Surely there are going to be bad banks at a given time, just as there are going to be good ones. The same could be said for any industry.

What makes me scratch my head about the "bad banks" theory is that now, all of a sudden, there is a cluster of errors. Seems there are no good banks left. What happened? Did they all turn irresponsible? I think not. I think the more likely explanation is that all banks were dealing with a) distorted information and b) not their own interests but the interests of politicians who were forcing their hand into making risky decisions.

You say that it was banks who thought that real estate would not devalue. Surely there were some bankers who held that opinion. Surely not all, though, right? Yet practically all banks operated under that assumption. Wonder why...Could it have been that the "indefinite appreciation" theory was espoused first by politicians who then legislated in that direction?

As far as banks wanting this, I'm sure they did. What business wouldn't want a guarantee that their product would be bought at a reasonable price by the government? Farmers sure love it. But wanting and causing are two separate things. The guarantee that the government has provided to banks is a luxury that not only should never have been afforded, but, i feel, is the driving factor behind the entire problem.

 
At 10/16/2008 12:23 PM, Blogger like such as said...

Anon 12:06

I couldn't agree with you more. I owe quite a bit of knowledge to the Austrians. Austrian economists have been foretelling this specific problem for years now because of the inherent inconsistencies in our system, the most serious of which is our unsound money.

 
At 10/16/2008 5:27 PM, Blogger OBloodyHell said...

> Do we really need a complete collapse of our economy before it's realized that we need to return to sound money?

What? The Gold Standard? Gimme a break.

> I couldn't agree with you more. I owe quite a bit of knowledge to the Austrians. Austrian economists have been foretelling this specific problem for years now because of the inherent inconsistencies in our system, the most serious of which is our unsound money.


The Austrians have been crying doom, death, and destruction for the last 10+ years.

But this "doom" we're experiencing is NOT tied to the problems they've been whining about during that time.

"The Gold Standard". Gimme a break. You want to stifle the economy, to slam it down on air brakes, that would be one guaranteed way to do it.

The growth of the economy has been far too rapid for a largely fixed-value supply like gold to be tied to.

I'm not saying that the money supply is either higher or lower than it ought to be, but tying it to Gold would be almost as stupid as listening to Keynes again. Not quite, but close.

The gold standard is fine when the economy is relatively stable and stagnant, as it was for the 20 years preceding Reagan. Since Reagan, though, the economy has been proceeding at a steady pace, and, unless Obama starts screwing it up by poking it randomly with a stick, it's going to start climbing back again, and it will recover fairly quickly. This is even more true if the public gets pissed enough at this crisis and someone starts pointing out that the entitlements issue needs to be dealt with NOW not 10 years from now when IT becomes a crisis.

If McCain gets elected, count on the Dow being back above 11k within five years, maybe even three.

If Obama gets elected, all bets are off.

 
At 10/16/2008 6:33 PM, Blogger like such as said...

obloody

If not related to what Austrians claim, what do you attribute this crisis to?

 
At 10/17/2008 3:56 AM, Blogger Arman said...

"The guarantee that the government has provided to banks is a luxury that not only should never have been afforded, but, i feel, is the driving factor behind the entire problem."
Baloney!
Business must operate on positive expectation or be left in the dust. Banks had to compete and get THEIR money out there. Banks are REQUIRED to secure sufficient equity in collateral before they can create money upon the collateral. Allowing 100% money/collateral was a DEREGULATION that in hindsight was probably not the wisest. Your thinking that the banks would naturally operate their business without rosy expectation is foolish. Such thing never has happened. Banks need regulation!

The government thinks money and banking important to the nation. It THOUGHT that issuing some assurances would improve the stability of the cash supply without costing anything. Government should not be in bed with business. It should not be backing banks or bailing out banks. It should regulate ONLY! As far as changing basic operation of a business just because of a government issued assurance or insurance... I think that any business that would operate that way deserves what it gets! Very bad business!
"Austrian economists have been foretelling this specific problem for years now because of the inherent inconsistencies in our system, the most serious of which is our unsound money."
If you run around declaring that the sky is falling, you are NOT validated by a meteorite.
Austrians complain about the Fed, and 'worthless' money all the time. They show no comprehension of either. They do not seem to realize that money is created in the lending, and is backed through the local bank to collateral. I've heard many complain about their worthless money, and have seriously offered to take it off their hands. No takers.
"Why do they think socializing the supply of money is going to lead to good results?"
The money supply isn't government run. It is still backed through the system of local banks as it always has been. The Fed is a glorified printer with delusions of grandeur, and nothing more. It is a disposable addendum to the banking service. You guys feed its delusions by all your ignorant complaining

 
At 10/17/2008 6:49 AM, Blogger juandos said...

Peter Schiff, liar or uninformed fool?

Interesting how Schiff really couldn't bring himself to take a serious look at the root cause of today's problem but only makes a general passing comment about government's intervention causing the fiasco...

Is this Schiff's attempt at being politically correct?

Hey arman and your fellow travelers going by the name of anon, ever consider doing a little homework first?

 
At 10/17/2008 9:42 AM, Anonymous Anonymous said...

I really laugh when Juandos wants to lay all blame of our current economic crisis on the "blame poor blacks" theory. Are we to believe the investemnt banks and their greed and bad accounting played a very minimal or NO role in our economic diaster.

I suggest Juandos read the information on this web-site,

http://gsereport.com/

instead of "parroting" the republican talking points. I wonder if Juandos still believes the other republican talking point of free-markets with no regualtions?

 
At 10/17/2008 11:31 AM, Blogger Arman said...

>"ever consider doing a little homework first?"<
You think that the problem evolved because of who the loans were made to. No! The problem evolved because of the fact that there was no cushion to the money supply when the collateral dipped in price. When mortgages were defaulted on, the banks foreclosed and could not sell the assets for the amount owed on the property. Therefore, the banks had to absorb a loss for every foreclosure, and with that loss, under the rules for the bank, had to further reduce their lending activities and further the contraction of money which furthered the fallout of prices.
Of course, I am just assuming what you meant by that statement and link. If you have a problem with something I say, why don't you quote it and explain to me exactly where you think I've gone wrong.

 
At 10/17/2008 2:08 PM, Blogger juandos said...

"I really laugh when Juandos wants to lay all blame of our current economic crisis on the "blame poor blacks" theory"...

Since YOU anon are the progenitor of this, "blame it on the blacks" thingie I'm indeed laughing, laughing at you for your less than tenuous grip on reality...

"Are we to believe the investemnt banks and their greed and bad accounting played a very minimal or NO role in our economic diaster"...

Did I say that? Please point that out...

Regarding your barking mad desire to base your crediblity on The GSE Report site, I suggest that you read it carefully and see if you can actually find some real world information that backs it up...

Now I found the following from anon especially funny: "instead of "parroting" the republican talking points. I wonder if Juandos still believes the other republican talking point of free-markets with no regualtions?"...

Do you even have the remostest idea of what you are talking about or is your continued defense of ACORN all you got?

"You think that the problem evolved because of who the loans were made to. No! The problem evolved because of the fact that there was no cushion to the money supply when the collateral dipped in price. When mortgages were defaulted on, the banks foreclosed and could not sell the assets for the amount owed on the property"...

Hey armon, maybe you should ask that question of Franklin Raines and his fellow travelers...

"Banks are REQUIRED to secure sufficient equity in collateral before they can create money upon the collateral"...

Apparently you've learned nothing at all about the CRA armon...

Maybe Nicholas Provenzo can it explain it to you again...

 
At 10/17/2008 2:36 PM, Blogger Arman said...

"Hey armon, maybe you should ask that question..."
I asked no questions. I made statements! If you disagree with the statement, then tell me why you disagree with the statement. Linking me to idiots with baseless opinion does nothing at all to refute my statements. Calling my statements questions makes me wonder if you are at all sane.
Again, that people sometimes default is not a problem. The ethnic breakdown of defaulters is moot. The problem is that the repossessions resulted in loss to the bank and so loss to the money supply.

 
At 10/17/2008 10:24 PM, Anonymous mr. Econotarian said...

I think it is a bit of a stretch to blame "regulation" for the current economic situation.

What is a more accurate description is that many people in the private marketplace misread the systemic risk of low downpayment mortgages and ARMs when the housing bubble would pop, and the systemic risk multiplier of CDOs and CDSs was missed as well.

On the other hand, regulations did not help: capital requirements for banks encouraged CDOs, the CRA encouraged low dowmnpayment loans, Congress forced the GSEs to take them as well (ignoring their own risk models) in the name of "affordable housing", etc.

I'm not sure if I want the Fed pre-emptively popping asset bubbles...that's how the great deflation set off the Great Depression because of Fed concern about stock speculation. Sometimes the cure is worse than the disease.

 
At 10/18/2008 9:47 AM, Anonymous qt said...

The FED normally stays away from pricking bubbles for this very reason.

The FED did, however, keep interest rates very low for an extended period of time even when it was clear that a bubble was developing in the housing market (Greenspan's famous "froth"). Raising rates earlier might well have prevented the worst of present meltdown in the housing market.

All of the elements came together to create the perfect storm.

 
At 10/19/2008 11:05 AM, Blogger Arman said...

"The FED did, however, keep interest rates very low for an extended period of time even when it was clear that a bubble was developing in the housing market (Greenspan's famous "froth"). Raising rates earlier might well have prevented the worst of present meltdown in the housing market."
Whar?? What to you is very low, and what to you is an extended period? Do you really think that the cash circulation today is dependent on interest rates from five years ago???
Money circulates quickly. Economic episodes are immediate. The state of the economy today is more dependent on expectations for tomorrow than it is on anything that happened as far away as last week! You wander through history trying to find answers without any comprehension as to what is happening today.

 

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