Tuesday, September 30, 2008
Really, I'm just kidding. There is absolutely no resemblance. I know, Goodwin's Law. But as I said, I'm just kidding. There's bad, scary socialism, and nice, cute socialism, and it's perfectly obvious here which is which. Does anyone know where I can get one of those sun rising in Obama land stickers for my truck? I saw one on a Hummer today and I thought it looked pretty cool.
Oh shoot. EM had the same idea. Well, great minds, same tracks and all that.
Oh, um, my eyes sort of slid over the bit Professor Rappaport quotes in Posner's post. I was impressed by the lucidity of his exposition of the basic mechanisms at work and somehow missed his stupid analysis of blame. What is the world coming to when Posner makes an error like this. I on the other hand will trust no one. No one!
Boy, does he ever! An astoundingly bad post. Posner claims: " I do not think that the government does bear much responsibility for the crisis. I fear that the responsibility falls almost entirely on the private sector."
Posner begins his power by pointing out the responsiblity of the businesses that purchased these problematic mortgage instruments without understanding what they were doing. Well, I have no disagreement here with Posner. The businesses are clearly at fault. The question is whether the government also bears responsibility.
Posner then notes some of the problems caused by government, but significantly only a small portion. For example, he leaves out the Community Reinvestment Act, which required the sale of mortgages for low income housing, or Fannie and Freddie's behavior, or a variety of other causes.
And here we get to the key fallacy of the post. Posner writes that these government acts are:
To a great extent . . . not responses by government, really, but by the private sector. Bernanke and Paulson are neither politicians nor civil servants; Bernanke is an economics professor and Paulson an investment banker. Their principal advisers are investment bankers rather than Fed and Treasury employees. . . . The White House, the Congress, and even the SEC have been only bit players in the response to the crisis. In effect, the government's power to repair the crisis that Wall Street created has been delegated to Wall Street.
Wow. Is Posner being dull witted here (hard to believe) or political (easier to believe, but still unlikely)? When people say that the government has significant responsibility for the financial crisis, their primary criticism is not of the type of people who go into government for the long term. Their primary criticism, instead, is that government power -- especially the coercive actions by government -- has been used poorly and is responsible for much of the crisis. It is simply irrelevant who exercises the government power. Indeed, if the government delegated coerced power to business to adopt a mandatory solution, that would still be government power.
Becker's accompanying post on the financial crisis was an able one that has often been linked to. I wonder if Becker will respond to Posner's post. Perhaps, the best thing for him to do is to avert his eyes, simply repeating, even Homer nods.
Note: This post had been published by mistake to an earlier day where I don't think many people saw it, so I am moving it to the top. It seems like it might be of interest given Tom's comments on Posner as "the national treasure."
Perhaps this will be a continuing series. Was the Constitution intended to evolve over time? No. Changes were only to be made by constitutional amendment. Consider this brief discussion from an early case construing the Pennsylvania Constitution of 1776 by Framer and Justice, William Patterson. In Van Horne's Lessee, he wrote:
The Constitution of a State is stable and permanent, not to be worked upon by the temper of the times, nor to rise and fall with the tide of events: notwithstanding the competition of opposing interests, and the violence of contending parties, it remains firm and immoveable, as a mountain amidst the strife of storms, or a rock in the ocean amidst the raging of the waves.
Monday, September 29, 2008
I don't know whether the Paulson Plan should have been passed or not, from the point of view of the national interest. A real live credit market freeze up worries me very much. I suspect the people of the US who are adamantly emailing their Congress persons have no idea about what a credit freeze up would mean to them. They would be much more upset by a 10 day moratorium on all video game play, which would probably be good for them. When they can't make payrolls or don't get paid, credit cards stop working etc., they might get it. I truly hope that does not happen. I all know about this is rumors, which I don't rely on.
OTOH many economists whom I respect have grave reservations about the plan. This post is particularly thoughtful and makes a lot of sense. Robert Shimer (Chicago) explains why the bailout really would just be a big payment to the institutions and persons who engaged in the worst MBS behavior, and would not even really get to the heart of the problem, which you could get to with a forced insurance scheme. (Though I wonder if that could be set up in time to help.) And the Paulson Plan would also set a very bad precedent.
Actually, I think it goes beyond that. I fear it would be the thing you worry about when you are setting the bad precedents. That it's the pile of sharp rocks at the bottom of the slippery slope. Especially with the most left wing president in history soon to take office (barring some sort of miracle -- sorry, hope I'm wrong, but that's how it looks to me) this would be a very bad time to create unprecedented powers in the hands of the Executive Branch to have its way with the financial sector. If the Democrats want to nationalize the financial sector, they should do it themselves and get the credit or blame for it.
Also, don't miss this on the canard that all this was caused by deregulatin' markets. Plenty of blame to share between Democrats and Republicans, but not much goes as far as I can see to free markets running free.
And here's a non-partisan view from Brad DeLong, who only wants to nationalize the insolvent banks (and with mark to market that could be a lot of them) and raze the GOP to the ground.
Some alarmism from the UK. Could happen though, I don't know.
Quoting H.L. Menken to the effect that the common people know what they want, and deserve to get it good and hard.
And there always NR to scare the wits out of you.
From Brad DeLong:
Second, I don't believe that after this the price of risk will ever again become a free-market price, just as after the Great Depression the short-term price of liquidity--the short term interest rate--ever became a free-market price. The federal government, in one form or another, is going to be in the business of insuring debt securities against steep declines in value. Securities that are not so insured will simply not be traded. What Fannie Mae did for "conforming" home loans, the Treasury or some other government agency will do for derivative securities. It will offer insurance, charge for that insurance, and supervise and oversee financiers much more strictly.
Third, the market fundamentalists in other sectors will need to be quiet for quite a while. We have just seen financial markets rife with moral hazard, agency, and adverse selection problems crash spectacularly. Is this a situation in which we should move health care--also rife with moral hazard, agency, and adverse selection problems--toward a free market configuration? No. Market regulation needs to be smart. But first market regulation needs to be.
I value Professor DeLong very much because he makes me realize I am not really all that paranoid.