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Don’t even try to blame this problem on "free markets"
Posted by: McQ on Monday, September 22, 2008

Of the bailout now being considered, the Heritage Foundation says the following:
As a general principle, conservatives believe government should not intervene to protect those who have made poor business decisions — even if those decisions have been influenced by excessive government regulation. But there can be rare situations where the cumulative effect of many bad decisions in one sector of the economy can threaten everyone. In these rare cases, government has a critical role in keeping the market’s infrastructure functional. We are in such a situation today.
What is the situation? James Pethokoukas has a couple of scenarios based in the reality of the situation:
1) Scenario 1: Great Depression "Lite." This is supposed to be the worst financial crisis since the 1930s. So let's assume that the total freezing up of American and global credit markets caused something half as bad as the Great Depression. From 1930 through 1933, the U.S. economy shrank by about 25 percent. Now let's say that by doing nothing and letting Mr. Market do his worst, the $12 trillion U.S. economy shrinks by half that amount (12.5 percent), or around $1.5 trillion over four years. (Also, figure a near doubling in unemployment.) But there's also the opportunity cost of not returning to growth, even at a so-so 2.0 percent a year. Doing nothing costs $1.1 trillion more in lost growth. So now we are down $2.6 trillion.

But wait: There's more. Let's assume the stock market drops an additional 25 percent or so. That's $3 trillion more in lost market capitalization. Plus, we are forgoing the opportunity to gain back what we have lost in the market, about $3 trillion. So, add the $6 million (sic) in lost market capitalization to the lost economic output, and we are at $8.6 trillion.

Then there is housing, already down $5 trillion, or roughly 20 percent. Let's conservatively say that we lose another $5 trillion by doing nothing. Plus, we forgo a partial rebound, say, $2.5 trillion. Adding together further housing losses (plus the lost opportunity to recoup some losses), and we are talking about a total cost of doing nothing of $15 trillion in four years for the whole megillah. But it could be worse.

2) Scenario 2: Great Depression 2.0. The economy shrinks by 25 percent over four years, or $3.2 trillion, plus $1.1 trillion in lost opportunity growth. Economic cost: $4.3 trillion. The market falls two thirds from its peak, losing $7 trillion in value from its current level, plus $3 trillion from not getting a rebound. Stock market cost: $10 trillion. Housing falls an additional $10 trillion from current levels, plus the lost opportunity of $2.5 trillion from a rebound. Housing cost: $12.5 trillion. Total four-year financial and economic cost of doing nothing: $26.8 trillion.

Now this is all a very rough guesstimate and doesn't include the costs of all sorts of other ramifications. Here is a fun one: the dissolution of China. Its economy is built for hypergrowth. A dramatically rising standard of living is both keeping the Communist Party in power and keeping the country together. Neither might survive a global economic meltdown. What is the economic impact of that? I don't know. My guesstimator just blew up.
So granted, we're in a very tough financial situation which has a horrible downside if nothing is done immediately. But as Lance mentioned last night on our podcast, essentially what is being proposed is stretching out the pain, because like it or not, what has been done must be paid for eventually.

Essentially Hank Paulson is hanging his hat on this statement:
"I am convinced that this bold approach will cost American families far less than the alternative: a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion."
The question, obviously, is "will it indeed cost us less?"

The answer is "not if we're simply shoring them up to do business as usual". And that "business as usual" isn't something done in the absence of regulation. As Lance pointed out in his piece yesterday, this was aided and abetted by regulatory exception and laxness, poor management and poor - very poor - oversight. Not to mention the fact that during the time this was building to this sorry climax, part of the reason it was going wrong is because government had made an economic issue a cultural one.

The solution, unfortunately, isn't going to punish those who made bad decisions, either among the financial institutions or the regulatory agencies or the institution with oversight responsibility - Congress.

Instead, the US taxpayer is going to bail out all of them - shore up the financial institutions, ignore the regulatory breakdowns and continue to allow Congress to "oversee" that which it hasn't done a good job at all of overseeing to this point (makes you just want to go out and throw health care right in their lap doesn't it?).

All of that in the name of saving taxpayers "pain" for having trusted government to properly regulate and oversee a sector into which it has intruded up too its neck over the years.

So yeah, maybe this is what has to happen in terms of lessening the impact of the collective poor decisions by all parties over the years. But don't try to then convince me that this is a problem of capitalism or free markets.

In a free market the institutions in question would never have gone there or if they had, failed miserably years ago. Of course, in a free market, an economic issue (housing and mortgage financing) would never have become a cultural issue with government intrusion paving the way for this debacle either.
 
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Comments
I think you are beyond hope.
This has nothing to do with free markets? Are you seriously gonna try and convince yourself of that? You sure arent going to have much luck convincing anyone else...

And I love the hilarious little attempt to discredit a process that you guys have destroyed.

Wingnuts are given responsibility to run the govt and prove to be unbelievably incompetent and corrupt. Therefore they win, since they prove the point of how useless government is.

Scams over, loser. Enjoy your exile in the wilderness. I’m guessing it’ll be 16 years minimum.
 
Written By: JoeCitizen
URL: http://
oooh, Mk posting as someone else. How cute
 
Written By: Joel C.
URL: http://
Scams over, loser
MK... is that you? Listen Joe, did you try reading for comprehension? Did you happen to notice how deep in the thick of this Obama is? How’d the 1st term Senator get that kind of cash from Fannie Mae? And Why? Who was it that set up Fannie Mae to begin with? What is their primary driver?
Enjoy your exile in the wilderness. I’m guessing it’ll be 16 years minimum.
That remains to be seen. Personally I think Obama is going to have trouble the next few weeks and McCain will do just enough to pull off a close win. But, should Obama win, I predict a 1 term debacle, which will mean a 2 year exile, and then the wonderful 2 year ’campaign’ against the incumbent.
 
Written By: meagain
URL: http://
Good article on the "Free Market Myth" —

An excellent post by Roderick Long.
 
Written By: T
URL: http://
Enjoy your exile in the wilderness. I’m guessing it’ll be 16 years minimum.
If Obama wins, he will be in office one term, no more. Everything points to him being a disaster of Jimmy Carter proportions.

If McCain wins and he doesn’t screw up too badly, Palin could be a good follow on. My understanding is that McCain only wants a single term, so we could end up with 12 years of McCain and Palin as President.

 
Written By: Don
URL: http://
Free Markets, which are as likely to exist in the real world as Tooth Fairies, is more than an impossible theory of economics. It’s a sincerely held form of BELIEF, a kind of Fable for College Republicans. In this DOGMA there exists a Camelot of chivalrous competetion amongst knights of Free Enterprise, where good always triumphs, and the Round Table polices itself for unethical behavior. Knightly cartels simply cannot exist in Free MArket Camelot.


Free Marketeers are forever adjusting their definitions of what exactly comprises THEIR iteration of a free market. Adjusting being need due to it’s proclivity to fall flat on it’s ideological face.

Saying SOME regulation IS needed instantly evaporates FM Camelot into the dust bin of history, and perhaps onto the Broadway Stage of famous legends.


 
Written By: Juan Man
URL: http://
Not a beat a dead horse, but this is a lovely and convenient tautology for libertarians. See, since there’s no market on earth free of government regulation, all economic problems can be blamed on regulation. And the evidence-free claim that "if the regulation hadn’t been there, everything would have been fine!" can always be made, but there’s never a test case, because... there is no real-life unregulated economy!
In a free market the institutions in question would never have gone there or if they had, failed miserably years ago
Yeah right. Unless they colluded and faced competitive pressure to all adopt the same net long-term destructive. Then maybe they would have failed years ago... all at the same time, rather exactly like they are now.
As Lance pointed out in his piece yesterday, this was aided and abetted by regulatory exception and laxness, poor management and poor - very poor - oversight.
Somehow, you go from "regulation wasn’t enforced and that made this worse" to "having no regulation at all would have fixed! it. I fail to follow your logic.
part of the reason it was going wrong is because government had made an economic issue a cultural one.
Cmon. Let’s be serious. They had every economic incentive in the world to make loans to people who couldn’t pay them back as long as they could make money off it - or, to be more specific, as long as they could count the existence of the loans as assets, and then borrow extra money off of those "assets", and then make money. It makes 100% sense under sheer Darwinian incentives to increase profit and growth. Right up until it explodes in everyone’s face. But the inherent tendency of businesspeople to dynamite their own system in order to maximize today’s returns has nothing to do with regulation and everything to do with basic human greed and ignorance.

America had a largely unregulated financial sector in the 1800’s, and the essence of what’s happening now is the same.


To look on the bright side, it appears our policy interests coincide for once. I don’t like this bailout either and have told my Democratic senator, to whom I contributed, not to vote for it as currently structured.
 
Written By: glasnost
URL: http://
I think even free market supporters would agree that free markets in financial products, especially where leverage is allowed, can easily lead to a boom bust cycle. (not to mention in commodities, real estate, etc.)

That does not mean that regulating markets to death will help much. (It may reduce some of the bust, but cut down on the booms as well, or do neither.)

Ideally, we’d find ways to deal with these busts much like earthquakes...build to survive them and not try to actually stop them.







 
Written By: Harun
URL: http://
Ideally, we’d find ways to deal with these busts much like earthquakes...build to survive them and not try to actually stop them.
The global economy is a giant collective action problem. Regulated systems are safer, and the stability of a globally regulated system results in more net growth than a more volatile, unregulated system.

However, the least regulated parts of a generally regulated global system overperform the more regulated parts in certain specific aspects - in the short run. The money flows towards the hot action.

The problem is that - for one thing - the more stable system grows more, net, than the volatile one that grows faster but repeatedly gives back 80% of the gains - and for another thing, the pain of catastrophic wipeout causes more harm than the slow growth, stable systems. Harm is, basically, negative deviation from whatever is perceived as normal. This is, really, a philosophically conservative argument against laissez-faire ’conservative’ economics.

The corollaries to this can be found in nature, where populations that grow explosively frequently run into serious, catastrophic problems and don’t do well against systems where growth gradually levels off into stability.

Meanwhile,
I think even free market supporters would agree that free markets in financial products, especially where leverage is allowed, can easily lead to a boom bust cycle
Maybe. I don’t have that level of confidence. I don’t think that Q’s post concedes that, for example. I perceive his post as blaming this set of events on a) Democrats b) regulatory incentives to get mortgages to poor people.

 
Written By: glasnost
URL: http://
This is a lot like the global collective action problem re: taxes. In carefully controlled circumstances, a narrow band of taxation a little lower than average in the rich world leads to rapid growth - and competitive pressure for other nations to lower their taxes. Meanwhile, the lowering of taxes steadily results in net economic and social harm - but even as the pie shrinks, those who keep taxes the lowest may stay roughly even - losing absolutely while gaining relatively -, while those who lower taxes the fourth-lowest are both absolute losers - losing the social and economic benefits of what the taxes were paying for - and relative losers - because they don’t get their fingers in the global pie of hot money. Eventually, revenue loss gets to the point where regulatory enforcement collapses, and then you get general systemic collapses like this one.

I can only speculate the extent to which #2 is involved here.
 
Written By: glasnost
URL: http://
It’s always nice to see libs like JoeCitizen exulting over the pain and misery of Americans and gleefully rubbing his hands over the prospect that his filthy party can use it to gain power for long periods.

If it’s bad for America, it’s good for libs.

But I digresss...

McQ - In a free market the institutions in question would never have gone there or if they had, failed miserably years ago. Of course, in a free market, an economic issue (housing and mortgage financing) would never have become a cultural issue with government intrusion paving the way for this debacle either.

The problem (as other commenters have pointed out) is that a totally free market has bigger swings in the boom / bust cycle. When times are good, they’re very good. When they are bad, they are bloody awful. This, as I understand it, is the point of the Fed: to tinker with the money supply to keep the busts from being so bad while trying to prolong the booms as much as possible. If the feds confined themselves to such "tinkering" - i.e. minimal regulation - then I agree: this crisis wouldn’t have happened. Banks, driven strictly by profit motive, would not have made all the risky loans, or, had their directors been crazy enough to lend $200,000 to people who make $30,000 per year, would have gone under long since. But, like Johnson and The Great Society, politicians saw all the money available for social engineering and didn’t bother themselves with risk analysis. And, so, here we are.
 
Written By: docjim505
URL: http://
It’s always nice to see libs like JoeCitizen exulting over the pain and misery of Americans and gleefully rubbing his hands over the prospect that his filthy party can use it to gain power for long periods.

If it’s bad for America, it’s good for libs.
There you go again. Reading the minds and hearts of other people, with absolute certaintude.

There you go again. Whinning about how anyone who doesn’t agree with YOUR anti-populist beliefs doesn’t LOVE AMERICA.

Let me tell you something, puppy.

The country you live in now, and want to roll back, was MADE by Liberals.

Conservatives have fought against American Liberalism since George Washington fought the Conservative King George. Washington was a revolutionary Liberal - and he proudly declared himself so.

Conservatives have been against EVERY momumental step towards a more perfect union.

Conservatives have been on the wrong side of history, throughout History, throughout the world.

Don’t tell me I root for what’s bad for America. You have no right to do so.

But it’s the only defense that the corrupt and failed defenders of the bankrupt conservative "philosophy" have - that by calling Liberals un-American, that slander somehow proves the accuser to be a patriot. Bull Dinky!!!


 
Written By: Juan Man
URL: http://
The country you live in now, and want to roll back, was MADE by Liberals.

Yes...liberals...not SOCIALISTS.

Or Liberal Fascists.

I think Paris is calling you. Maybe it’s time to emigrate?
 
Written By: T
URL: http://
Test for IP address banning.
 
Written By: Juan Man
URL: http://
It’s obvious the only tool available in your quiver is calling your antagonist names.

 
Written By: Juan Man
URL: http://
So you want to repeal Social Security?



 
Written By: Juan Man
URL: http://
I am getting banned posting - using totally acceptable words. This is pathetic.
 
Written By: Juan Man
URL: http://
"repeal Social Security"

No, I think it works. Like flying cars, flubber and cars-running-on-water. We should just stamp "guaranteed by the full faith and credit of the Tooth Fairy" on every SS statement.
 
Written By: T
URL: http://
Social Security is the most efficient social dues system ever invented.

It is lean and mean because administrators make 100K a year, instead of greedy CEOs making 250 million a year, plus perks.

That’s why US Free Market Health Care sucks, even though it’s the costliest system in the world. Fully one-quarter of the costs go to greedy fat cat corporate welfare CEOs.


 
Written By: Juan Man
URL: http://
Juan,

Question 1: which party was Lincoln in and who did he run against for that supported slavery.

Question 2: which party tried their hardest to stop the civil right ammendment in the 60s.

Question 3: which party inthe south had the most klan members

Question 4: which party has a former klan kleagle as one of their most senior senators



 
Written By: capt joe
URL: http://
"I am getting banned posting"

An awful (heh) lot of posting for someone banned.
 
Written By: timactual
URL: http://
Juan,

Question 1: which party was Lincoln in and who did he run against for that supported slavery.

Question 2: which party tried their hardest to stop the civil right ammendment in the 60s.

Question 3: which party inthe south had the most klan members

Question 4: which party has a former klan kleagle as one of their most senior senators

Written By: capt joe
Replies

1- The original Republican Party. Don’t be fooled by Labels. That was 2 centuries ago. The question is which party has kept millions of African-American voters from voting in the last 40 years. Today’s Republican Party. It is fairer to note that those Southern Democrats who defected in 1964 and 1965 because of the Democratic Party’s push for the Civil and Voting Rights acts have become today STAUNCHEST Republicans. The Southern Strategy it is called.

2- This is a loaded question. There was resistance in both parties. BUT the undeniable fact is that a DEMOCRATIC president, a powerful legislator, LBJ, was FULLY responsible for changing enough minds in Congress to pass the CRA of 64 and 65.

3- The Dixiecrat Party - who had to rebel (yet again) against the mainstream Democtratic Party, and become their own party.

4- Well we don’t know about which Republicans were upper klansman, but we DO know about Robert Byrd, who has grown as a human being. He has progressed in a positive way as a human being, while the Republicans are in NO WAY any longer the party of Lincoln.

The moral of the lesson is don’t believe Newt Gingrich’s rewriting of American history. Gingrich is a lying, wife cheating phony, a propagandist who takes credit for Social Security as a safety net, even as he is trying to kill it.

 
Written By: Juan Man
URL: http://

 
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