Subsequent to a recent discussion with a colleague at odds about the supposed fallacies of free markets which I argued were caused at root by government intervention, I found this article detailing the historical trail of government policies that caused the Savings and Loan crisis of the late '80s.
Many people mistakenly attribute the implosion of the S&L's to Reagan's deregulatory policies and perhaps that may have been the tipping factor, but the house was on the verge of collapse already because it had not been built not by market forces, but by incompetent governmental tinkerers.
From "The Real Reagan Record" in The National Review of Aug 31, 1992
http://www.nationalreview.com/reagan/niskanen200406101410.asp
Going all the way back to 1932 with the creation of The Federal Home Loan Bank System, instabilities were exacerbated by non-free market factors.
"the structure of the savings-and-loan industry was designed in Washington, rather than by evolutionary market processes. A 1932 act created the Federal Home Loan Bank System, with a structure much like that of the Federal Reserve System, to increase the funds available to reasonably solvent S&Ls to finance home mortgages."
Regulatory restrictions on their asset structure incentivizing home mortgages seems to be the the primary cause of the instability.
One of the interesting conclusions of this article is it's negative judgement of the FDIC in 1934. If there is validity to this, then the recent increase in deposit insurance limits from $100K to $250K would be rather alarming.
"Most important, deposit insurance creates a moral hazard for the owners of weak or insolvent banks and S&Ls, in effect setting up a one-sided bet. If they make unusually risky loans that do not later default, all the returns accrue to the owners; if these loans fail, the losses are borne by the insurance fund and, ultimately, the taxpayers. Heads I win, tails you lose. "
Saturday, October 18, 2008
Wednesday, October 15, 2008
Forclosures Overblown?
So today some comments on the market situation (is there any other subject right now? LOL) prompted me to dig into some statistics as the media makes it out like every other home on the block is being foreclosed.
The actual rate of foreclosure is .6%. 3.6% of all residential mortgages were delinquent for at least 90 days. 20.4% of subprime mortgages were delinquent for at least 90 days. By this reckoning, only 1 in 5 of people who shouldn't have gotten loans in the first place are even late?
http://www.housingzone.com/blog/500000650/post/1980033398.html
And of course the media focuses on markets where the averages are skewed due to incredible overbuilding. I'm not proposing that there isn't a problem, but how much of it perceptual and it's this perception issue that caused the credit crunch in the first place.
The actual rate of foreclosure is .6%. 3.6% of all residential mortgages were delinquent for at least 90 days. 20.4% of subprime mortgages were delinquent for at least 90 days. By this reckoning, only 1 in 5 of people who shouldn't have gotten loans in the first place are even late?
http://www.housingzone.com/blog/500000650/post/1980033398.html
And of course the media focuses on markets where the averages are skewed due to incredible overbuilding. I'm not proposing that there isn't a problem, but how much of it perceptual and it's this perception issue that caused the credit crunch in the first place.
Tuesday, October 14, 2008
Obama's Plan for Redistribution of Wealth
So I just got off the fence. I've been very positive about Obama since the beginning and if it wasn't McCain running against him (who I have be an ardent fan of his moderate positions for over a decade), I wouldn't have been on the fence at all.
As a dedicated libertarian (small "L") who supports free markets, limited government, and more individual freedom, I abhor anything that smacks of moving toward collectivism. The current solutions to this economic crisis are alarmingly collectivist, and a recent street conversation between Obama and a plumber that he wants to move even more that way has firmly made up my mind.
Plumber to Obama: “Your new tax plan is going to tax me more. Isn’t it?”
Obama: “It’s not that I want to punish your success, I just want to make sure that everybody that is behind you, that they have a chance for success too. I think that when you spread the wealth around, it’s good for everybody.”
http://www.620wtmj.com/shows/charliesykes/30935599.html
As a dedicated libertarian (small "L") who supports free markets, limited government, and more individual freedom, I abhor anything that smacks of moving toward collectivism. The current solutions to this economic crisis are alarmingly collectivist, and a recent street conversation between Obama and a plumber that he wants to move even more that way has firmly made up my mind.
Plumber to Obama: “Your new tax plan is going to tax me more. Isn’t it?”
Obama: “It’s not that I want to punish your success, I just want to make sure that everybody that is behind you, that they have a chance for success too. I think that when you spread the wealth around, it’s good for everybody.”
http://www.620wtmj.com/shows/charliesykes/30935599.html
Sunday, October 12, 2008
Are There No Libertarians In a Crisis?
An article in Forbes yesterday by Bob McTeer was indicative of the current crises of economic thought. Libertarians have not had much of a voice and seem to have lost influence through misperception. Without any non-radical messianic leaders like Milton Friedman and Friedrich Hayek, there is no one to provide a touchstone to Free Market ideals and how far we actually have come.
http://www.forbes.com/2008/10/10/libertarian-federal-reserve-oped-cx_bm_1010mcteer.html
My response:
While I enjoy the joke on Objectivists, I have to cordially disagree in principle as to how Free Market Economists would handle the current situation, which was exacerbated by Keynesian/interventionist policies to begin with. Fear of the unknown (being in the foxhole as it were) does drive those of little faith to grasp at straws in crisis.
If we had economists who understood and believed as strongly as Friedman or Hayek today, we would have real solutions rather than panic induced money throwing (ritual sacrifice?).
True Free Markets are much more resilient and more quickly corrective than any Central Planning measures. Isn't the fact that Warren Buffet, Citi, Wells Fargo and others are buying up devalued assets indicate economic Darwinism is already happening? Two of the Big Three automakers finally merging to get more competitive?
Search your doubting libertarian soul, buying up the Commanding Heights isn't the best solution.
http://www.forbes.com/2008/10/10/libertarian-federal-reserve-oped-cx_bm_1010mcteer.html
My response:
While I enjoy the joke on Objectivists, I have to cordially disagree in principle as to how Free Market Economists would handle the current situation, which was exacerbated by Keynesian/interventionist policies to begin with. Fear of the unknown (being in the foxhole as it were) does drive those of little faith to grasp at straws in crisis.
If we had economists who understood and believed as strongly as Friedman or Hayek today, we would have real solutions rather than panic induced money throwing (ritual sacrifice?).
True Free Markets are much more resilient and more quickly corrective than any Central Planning measures. Isn't the fact that Warren Buffet, Citi, Wells Fargo and others are buying up devalued assets indicate economic Darwinism is already happening? Two of the Big Three automakers finally merging to get more competitive?
Search your doubting libertarian soul, buying up the Commanding Heights isn't the best solution.
Milton Friedman Wasn't Wrong
In response to an article on the Motley Fool about a quote by Milton Friedman:
"There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game."
The author feels that our culture has developed a "Gordon Gecko" mentality of greed at all costs, but the fallacy is that there are costs to excessive greed.
Here is the article http://www.fool.com/investing/general/2008/10/04/trashing-milton-friedman.aspx
And my response:
There is a tremendous difference between "unrestrained capitalism" and the Keynesian interventionism we still operate under.
Buffet's comment that "It takes 20 years to build a reputation and five minutes to ruin it." implies there are negative consequences to negative greedy actions. Either to the corporate bottom line, civil litigation with monetary penalties, or criminal charges.
Government bailouts and golden parachutes with no penalty clauses simply sustain the belief that there are no consequences.
"There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game."
The author feels that our culture has developed a "Gordon Gecko" mentality of greed at all costs, but the fallacy is that there are costs to excessive greed.
Here is the article http://www.fool.com/investing/general/2008/10/04/trashing-milton-friedman.aspx
And my response:
There is a tremendous difference between "unrestrained capitalism" and the Keynesian interventionism we still operate under.
Buffet's comment that "It takes 20 years to build a reputation and five minutes to ruin it." implies there are negative consequences to negative greedy actions. Either to the corporate bottom line, civil litigation with monetary penalties, or criminal charges.
Government bailouts and golden parachutes with no penalty clauses simply sustain the belief that there are no consequences.
Saturday, October 11, 2008
Government Bailouts
I recently read "people love capitalism until it's time to take some losses and then they clamor for socialism (i.e. government intervention)". We are seeing this today with the bailouts and nationalization of much of the banking sector.
Should the government intervene? Over the preceding weeks, the American people rose up in protest (at least as much as we can manage these days - emailing notes to their Congressmen?) against calling on the taxpayers coming to the aid of major corporations that made bad investments.
Over the past 30 years we have seen the Dow Jones Industrial Average, which we generally regard as a barometer of the American Economy, go from a relatively stagnant period of decades hovering around 1,000 begin a long and steady climb beginning in the Mid-80's after Reagan's free market reforms to it's first peak in 1999/2000 of just under 12,000 an increase of 1,000%. 3-1/2 years of significant volatility after the "Dot Com Bubble" recession over-corrected the market valuation to a low of about 7,500 a drop of almost 40%.
Only four years later the market peaked at 14,000, an increase of almost 100%!
In retrospect, can we attribute much of the the recent economic bubble to the government artificially depressing interest rates to bolster the housing sector and consumer spending (possibly to distract from an expensive and unpopular war?). It's easy to point the finger at greedy Wall Streeters, but perhaps more of the blame rests with Government interventionism exacerbating fluctuations in normal market cycles of growth and correction?
We constantly see the failures of central planning and regulation and have hundreds of thousands of pages of regulation, but the only solution our brilliant "law makers" can come up with is throwing (our) money at the problem and making more laws. I constantly ask myself why we don't have anyone in Washington who has the least understanding of economic theory and free markets? Why do we always fall back on the failed principles of Keynesian every time there is a market correction?
Should the government intervene? Over the preceding weeks, the American people rose up in protest (at least as much as we can manage these days - emailing notes to their Congressmen?) against calling on the taxpayers coming to the aid of major corporations that made bad investments.
Over the past 30 years we have seen the Dow Jones Industrial Average, which we generally regard as a barometer of the American Economy, go from a relatively stagnant period of decades hovering around 1,000 begin a long and steady climb beginning in the Mid-80's after Reagan's free market reforms to it's first peak in 1999/2000 of just under 12,000 an increase of 1,000%. 3-1/2 years of significant volatility after the "Dot Com Bubble" recession over-corrected the market valuation to a low of about 7,500 a drop of almost 40%.
Only four years later the market peaked at 14,000, an increase of almost 100%!
In retrospect, can we attribute much of the the recent economic bubble to the government artificially depressing interest rates to bolster the housing sector and consumer spending (possibly to distract from an expensive and unpopular war?). It's easy to point the finger at greedy Wall Streeters, but perhaps more of the blame rests with Government interventionism exacerbating fluctuations in normal market cycles of growth and correction?
We constantly see the failures of central planning and regulation and have hundreds of thousands of pages of regulation, but the only solution our brilliant "law makers" can come up with is throwing (our) money at the problem and making more laws. I constantly ask myself why we don't have anyone in Washington who has the least understanding of economic theory and free markets? Why do we always fall back on the failed principles of Keynesian every time there is a market correction?
Regulators Cannot Avert Next Crisis http://www.cato.org/pub_display.php?pub_id=9696
by Johan Norberg
Johan Norberg is a senior fellow of the Cato Institute and the author of In Defense of Global Capitalism.
Added to cato.org on October 7, 2008
This article appeared in The Australian on October 7, 2008
"The problem with regulation is that it is always a response to the last crisis. Generals fight the last war and always try to avoid the mistakes made then. So we get new rules that target the mistakes that everybody already knows they must avoid. The next possible crisis and its causes are so far unknown, and our regulations may have no effect or even make them worse. "
Step Back - It's Not So Bad
At the top of my mind as global financial markets are in turmoil and people are panicking, is that people are generally in denial about the cyclical nature of Free Markets. Just as with any growth stock of a strong company, the long term trend is upward, but there are periodic corrections when overvaluation temporarily occurs.
Step back and look at how far we've come
Excerpted from http://www.fff.org/freedom/fd0301b.asp
"In Pursuit of Sustainable Development: Political Planning versus the Free Market"
by Richard M. Ebeling, January 2003
World hunger and poverty have been dramatically reduced around the world during the last half-century. Since 1950, world population has increased by 90 percent. But because of increased production and productivity in global agriculture, average daily food supplies per person have increased 24 percent, worldwide, during this same period; and the increase has been even larger in developing countries, being about 38 percent on average per person.
Life expectancy also significantly improved during the last 50 years. In 1950 life expectancy in the developed countries was 66.5 years, while in the developing world it was 40.9 years. In 1998, life expectancy had risen to 74.5 years in the developed countries (a 12 percent increase) and to 63.6 years in the developing nations (a 55.5 percent increase).
In Africa life expectancy between 1950 and 1998 increased by 42.3 percent, from 37.8 years to 53.8 years; while in India, life expectancy rose by 62.5 percent, from 38.7 years to 62.9 years.
Infant mortality has also shown the same positive trend over the past 50 years. Worldwide, 156 children out of 1,000 births died under the age of one in 1950; that fell to 58 out of every 1,000 births by 1998, or a decline of 63 percent. Fifty years ago the infant mortality rate was 58 out of every 1,000 births in the developed countries, and 179 out of every 1,000 in the developing nations. These fell, respectively, to 9 and 64 out of every 1,000 births, percentage declines of 85 percent and 65 percent, respectively. The decline was 64 percent in India during this period, from 190 to 69, and a decrease of 50 percent in Africa during this half-century, from 185 to 91 per 1,000 births.
Literacy has also been on the rise in recent decades. Between 1970 and 1997, illiteracy worldwide dropped from 45.8 percent of the global population to 25.6 percent. And child labor during this period has also declined. Among children between the ages of 10 and 14 around the world, child labor has decreased from 24 percent to 12.6 percent.
Step back and look at how far we've come
Excerpted from http://www.fff.org/freedom/fd0301b.asp
"In Pursuit of Sustainable Development: Political Planning versus the Free Market"
by Richard M. Ebeling, January 2003
World hunger and poverty have been dramatically reduced around the world during the last half-century. Since 1950, world population has increased by 90 percent. But because of increased production and productivity in global agriculture, average daily food supplies per person have increased 24 percent, worldwide, during this same period; and the increase has been even larger in developing countries, being about 38 percent on average per person.
Life expectancy also significantly improved during the last 50 years. In 1950 life expectancy in the developed countries was 66.5 years, while in the developing world it was 40.9 years. In 1998, life expectancy had risen to 74.5 years in the developed countries (a 12 percent increase) and to 63.6 years in the developing nations (a 55.5 percent increase).
In Africa life expectancy between 1950 and 1998 increased by 42.3 percent, from 37.8 years to 53.8 years; while in India, life expectancy rose by 62.5 percent, from 38.7 years to 62.9 years.
Infant mortality has also shown the same positive trend over the past 50 years. Worldwide, 156 children out of 1,000 births died under the age of one in 1950; that fell to 58 out of every 1,000 births by 1998, or a decline of 63 percent. Fifty years ago the infant mortality rate was 58 out of every 1,000 births in the developed countries, and 179 out of every 1,000 in the developing nations. These fell, respectively, to 9 and 64 out of every 1,000 births, percentage declines of 85 percent and 65 percent, respectively. The decline was 64 percent in India during this period, from 190 to 69, and a decrease of 50 percent in Africa during this half-century, from 185 to 91 per 1,000 births.
Literacy has also been on the rise in recent decades. Between 1970 and 1997, illiteracy worldwide dropped from 45.8 percent of the global population to 25.6 percent. And child labor during this period has also declined. Among children between the ages of 10 and 14 around the world, child labor has decreased from 24 percent to 12.6 percent.
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