The Right Coast

Editor: Thomas A. Smith
University of San Diego
School of Law

Thursday, December 25, 2008

Bernstein on Libertarianism and the Financial Crisis
Mike Rappaport

David Bernstein concludes an excellent post with these outstanding words:

Libertarians of the utilitarian school often oppose government regulation not because they think that all government regulation is inherently illegitimate, or even necessarily bad, but because on balance they think that decisions made through the political process, or by regulators (like Greenspan) acting with limited information, are likely in most cases to be less sound than decisions made through decentralized market processes. It seems to me that many of the bad decisions made, both on the pro (Fannie, Freddie, Community Reinvestment Act, etc.) and anti (failure to regulate derivatives, leverage, etc.) were not the result of any particular ideology, but the natural result of the political process. One problem with the inevitable "mixed economy" that we live in, and which libertarians would predict, is that the political process will often give us the worst possible result--privatization of profit, socialization of risk.


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Mike Rappaport


Exactly how did the public make these bad decisions? Never underestimate the ability of "experts" to arrive at monsterously disasterous decisions.

As for the community redevelopment act and the Fannie Mae debacle do you really believe Ronald Reagan would have sanctionewd these policies? It takes a RINO or a Lefrwing progressive to justify "affirmative action mortgages."

Posted by: Thomas Jackson | Dec 25, 2008 10:13:25 PM

Mike, I agree with you and David. So where does this leave us? Is libertarianism, like communism, a beautiful ideal that only leads to disaster when attempted in the real world? Or does it have something to say about "the inevitable 'mixed economy' that we live in", beyond, "in an ideal world, we wouldn't have this problem"?

More specifically, the problem of de facto political control of the money supply is a result of the bitter lesson learned from the Great Depression and previous busts: that *somebody* needs to be able to boost the money supply when market crashes cause it to go into free fall. Can libertarianism offer any suggestions, beyond something like, "well, in an ideal libertarian world, there would be no government-controlled currency--all currency would be based on private obligations, as in the early days of the banking system"?

Posted by: Dan Simon | Dec 26, 2008 11:01:04 PM

Dan: Free market types are useful in several ways. First, they help us get clear on what is causing the problem. If it is a monetary phenomonon, like the Great Depression, let's not blame the market. Getting the diagnosis right is important. Second, the cure is more complicated, but I don't believe your analysis is right. To begin with, the Great Depression was the result of bad bureaucrats. So don't blame that on free markets. The mistakes of Greenspan show that even a wise regulator, who was viewed as very successful, can make extremely big mistakes. Milton Friedman argued that the Great Depression and other events showed that we ought to adopt a monetary rule to avoid these mistakes. I don't know enough to say, but perhaps the right rule would have avoided Greenspan's mistakes. Finally, it is always worth knowing the ideal, even if it is not politically possible at the time. Thus, knowing whether free banking would work is important.

Posted by: Mike Rappaport | Dec 27, 2008 2:25:15 PM

And in other breaking news, it sometimes snows at the North Pole....

Posted by: Andronicus | Dec 28, 2008 8:57:09 AM

I'm all in favor of trying to "get clear on what is causing the problem", Mike--but so far the "free market types" I've been reading have mostly been dragging out red herrings like CRA, Fannie Mae/Freddie Mac, and now the tax exemption on capital gains on home sales, in an apparent effort to turn a difficult economics question into a trite morality tale about the evils of regulation. How is that helping us "get clear on what is causing the problem"?

As for the actual causes of the Great Depression and the current recession, I think you're misunderstanding my position. Yes, of course, "bad bureaucrats" are the cause, in the sense that they implemented the wrong monetary policy. The problem is that (1) when the most venerated economists in the world get monetary policy so badly wrong, it's clear that we simply don't know how to get it right; and (2) there simply are no "free market" solutions to the problem of how to regulate the money supply--at least none that haven't been shown pretty conclusively to be a recipe for economic disaster.

So what do "free market types" do when neither free markets nor technocrats have any solutions to offer?

Posted by: Dan Simon | Dec 29, 2008 10:00:18 PM