Meltdown - Causes (cont.)

• Jeff Jacoby exposes Barney Frank's role in the bubble
• Here is an article from the New York Times in 1999 showing Fannie Mae "easing the credit requirements on loans that it will purchase from banks and other lenders"
• Of course, politicians bragged about the increase in home ownership when it benefited them. And why did Fannie Mae ease credit requirements? "The top priority may be to ask more of Fannie Mae and Freddie Mac. The two companies are now required to devote 42% of their portfolios to loans for low- and moderate-income borrowers; HUD, which has the authority to set the targets, is poised to propose an increase this summer."
• Many of those sub-prime mortgages went to minorities just like politicians wanted, but in 2001, politicians wanted it both ways - pressure the banks to make loans and sue the banks for pushing those loans
  
• In 1997, Wachovia (then First Union) bragged about their involvement with the Community Reinvestment Act
• More blame for Fannie and Freddie
  

However, political pressure can only go so far. If the means are not available, there is only so much credit that can be loaned out. That is where the Federal Reserve comes in via its loose monetary policy. Financial institutions were able to come up with creative ways to provide loans to high risk borrowers because credit was easily available (especially after the the 2000-2001 recession and 9/11).

Many people want to blame an era of laissez-faire capitalism for this mess because corporations were involved. It is not, however, "laissez-faire" when governments use corporations to enact egalitarian goals. That is probably best described as Corporate Socialism.

Meltdown - Regulations (cont.)

Over the past few weeks I've heard and read the familiar refrain that our current financial meltdown is due to the wave of deregulation that began under the Reagan Administration. We are led to believe that Reagan swept in a laissez-faire philosophy that has created an unsustainable economy.

So I decided to look up some of the key pieces of legislation that were responsible for this wave of deregulation. What I found was interesting considering how the Left and the Right want to portray the history of the past 30 years.

• Airline Deregulation Act of 1978
• The Motor Carrier Act of 1980 to deregulate the trucking industry. When Carter signed the bill he said, "I have today signed into law S. 2245, the Motor Carrier Act of 1980. This is historic legislation. It will remove 45 years of excessive and inflationary Government restrictions and redtape. It will have a powerful anti-inflationary effect, reducing consumer costs by as much as $8 billion each year. And by ending wasteful practices, it will conserve annually hundreds of millions of gallons of precious fuel. All the citizens of our Nation will benefit from this legislation."
• The Staggers Rail Act of 1980 to deregulate the rail industry
• Depository Institutions Deregulation and Monetary Control Act of 1980 - this was the first law to undo various aspects of Glass-Steagall Act of 1933 (the favorite of many progressives)
• Garn-St. Germain Depository Institutions Act of 1982 - this one was a Reagan initiative but it had broad Congressional support (including Democrat Charles Schumer). It was the next step in undoing Glass-Steagall.
  

Now, I don't want to get into the economic effects of these laws, either good or bad. Each particular case most likely involves subtleties that make them less than perfect free-market solutions. The point here is to show that blaming deregulation on a free-market ideology forced on the country by Reagan is just silly. Or you could just call Jimmy Carter a laissez-faire ideologue.

Don't get me wrong, I am not saying that all this is Jimmy Carter's fault. Nor am I saying anything about the Reagan Administration. All I want to show here is that the history of the past 30 years is not as simplistic as many "progressives" want us to believe.

Whatever

• As the state grows we all become criminals. I can't believe you have to have a license to own a TV! Oh, and check out number seven on the list.
• Give me your tired, your poor, Your huddled masses yearning to pay taxes
• Bailout spam
• Wow! China is crowded
• A good history of laissez-faire (or the lack thereof) in America
• Obama promises to stop America's shitty jobs from going overseas (NB: bad language)
• Property rights save the environment
• Never ask a question to a live audience if you don't want to know the answer
• Just pile it on

Meltdown - Causes

Over the past several days I've read many theories on the causes of the current financial meltdown. Ranging from greed to too little regulation to too much regulation, everyone seems to have THE reason why we are in this mess.

This brings up something that I've learned over the years from the Austrian School of Economics and Ludwig von Mises in particular - and that is that history is complex. You can explain almost any theory by picking data points from history. To truly understand history, however, you must have a correct theory*. Now, I happen to agree with the Austrian view of economics, but that's not the point. The point is that anyone claiming to explain economic problems must have a logically consistent theory. Pointing to some past event and saying "Aha!" is not a valid argument. Why that past event had the consequences it did can only be explained by good theory.

I could be wrong, but I personally believe that the Austrian Theory of the Business Cycle best explains the situation we are in now. Most other arguments I am hearing tend to lack some underlying mechanism that fuels the boom which leads to the bust. The Austrian Theory gives us that fuel in the guise of monetary expansion. Unless something is done about that underlying mechanism, we will continue to suffer from economic crises.

Anyway, here are some good articles about the current mess that aren't necessarily Austrian:

• Russ Roberts takes a look at tax policy changes in the 1990s. Be sure to check out other recent articles by Russ at CafeHayek - he is sorting out his thoughts on this matter.
• What role did Fannie and Freddie play? And did Bush try to regulate the FMs only to be thwarted by Congressional Democrats?
  
• Arnold Kling sees causes in both private markets and government regulators. BTW, EconLog is another good blog to keep an eye on.
• Sheldon Richman looks at greed and "lack of regulation" arguments
• Carpe Diem looks at the difference between Canadian and U.S. regulations during a previous economic meltdown
  

* See Ludwig von Mises' Theory and History

Meltdown - Regulations

Many writers have blamed the current financial crisis on too little regulation of the market. In particular, they have blamed the 1999 repeal of the Glass-Steagall Act that was enacted in 1933 in the midst of another financial meltdown. That Act created, among other things, a wall between investment and commercial banking. It is claimed that the Act's repeal allowed for the creation of “mega-banks” which, we are led to believe, precipitated the current crisis.

However, what we have seen thus far is the failure of two government-sponsored mortgage institutions (Fannie Mae and Freddie Mac), an insurance company (AIG), and two investment houses (Bear Stearns and Lehman Bros.) - none of which would have fallen under the Glass-Steagall regulations. In fact, those companies that have both investment and commercial banking operations are so far weathering the current storm.

Megan McArdle has some thoughts on Glass-Steagall as well.

Tyler Cowen also examines the idea that there was too little regulation. In fact, he says, the regulation was just ineffective.

[F]inancial regulation has produced a lot of laws and a lot of spending but poor priorities and little success in using the most important laws to head off a disaster. The pattern is reminiscent of how legislators often seem more interested in building new highways — which are highly visible projects — than in maintaining old ones.

He also sends a warning about rushing into creating new regulations:

[I]f you hear a call for more regulation, without a clear explanation of why regulation failed in the past, beware. The odds are that we’ll get additional regulation but with even less accountability and even less focus on solving our very real economic problems.

Whatever

• How can you not love dogs?
• I've always loved good slight of hand card tricks. Ed Brayton links to some YouTube videos of Ricky Jay doing some amazing stuff.
• The future is so disappointing
• Ah! What would a new technology be without a call for "government action." This quote is priceless: "I do think government has an almost infinite ability to screw up things when they can't see the future."
• I wonder if this school teaches bad acting as well
• Just cut their pay
• When markets governments fail, government markets must step in
  

Great Gig in the Sky

In memory of Richard Wright.

"Gouging for greed"

The top story on the local news today was how North Carolina Attorney General Roy Cooper was issuing subpoenas to seven local gas stations accused of "price gouging" over the weekend. Cooper said that "gouging for greed will not be tolerated in North Carolina." My wife nearly got spaghetti sauce spat upon her face when I heard that comment. It is depressing that an adult in a position of authority could utter such an inane comment. It is even more depressing that there are people out there who buy this inanity and cheer him on.

More importantly, however, was the second story that showed some stations running out of gas over the weekend. The reporter in the story said that the stations had "reasonable" prices. Could there be a correlation between the first story and this one? The stations that ran out of gas tried to limit customers to $20 worth of gas. This form of rationing is apparently legal albeit less effective.

One more thing on "greed." With the recent problems in the financial sector and, of course, the gouging controversy, many pundits are talking about greed as if it is a characteristic solely of businessmen. The late Milton Friedman had the best response to this nonsense.

Who's gouging who?

Wow! I was driving home from work today and noticed that gas prices had jumped dramatically. Apparently people are panicking that Hurricane Ike will cause some serious disruptions in gasoline supplies.

North Carolina Attorney General Roy Cooper was on the news saying that gas stations will be prosecuted if they "gouge." There were people waiting in line for gas being interviewed saying that it wasn't fair that the stations were raising prices. Oh, but it's fair for you idiots to rush out suck up all the gasoline!

Here is a quote from Cooper:

"I encourage gas stations to avoid panic price increases and consumers to avoid panic fill-ups."

Words have no teeth Mr. Cooper - higher prices do. In situations like this raising prices is the best way to stop people from panicking.

What would an episode like this be without the following argument:

"That's not what they paid for it. It just seems to me they shouldn't raise (the price) until they have to pay for it"

That was someone waiting in line complaining that the station shouldn't be allowed to raise the price on gas they bought at a lower price. Oy vey! This is why a knowledge of basic economics is so important.

Stations have to make sure they have a steady supply of gasoline so that they can attract customers. If their tanks are empty they get no business (or reduced business). With the hurricane causing uncertainty around national supply chains, stations need to make sure they have some supply to last during the temporary crisis. The price they paid for a good in the past is irrelevant when it comes to decisions they need to make in the present and near future.

Phil Gramm was right for the wrong reasons - we are a nation of whiners.

Take the "gasoline shortages" quiz at CafeHayek.

Whatever

• If you are reading this then the LHC worked. You might want to keep checking, though.
• 30 nanoseconds?! But I want it now!
• The Darwin Stain
• When markets governments fail the government market must step in. "[I]t was proving increasingly difficult for Britons to get anything beyond basic dental care from Britain's National Health Service." (HT: Carpe Diem)
  
• It is a shame that this question even has to be asked
• Yeah, Google is soooo bad for consumers. Oh wait, antitrust is not about consumers.
• Wow! Is anything legal in Britain? At least you can still vote with your feet.
  

Whatever

• The inhumanity of some people
• Robert Samuelson reports on contrary evidence regarding American living standards. I think there is a lesson to be learned here about drawing conclusions from aggregate numbers in a diverse and dynamic society. (HT: CafeHayek)
• More bureaucracy, more spending, and more crony capitalism all in the name of science. I am still trying to figure out what Obama means by "change."
• When you devalue the currency, people go primitive
• Art by paint ball
• Here's an investment tip for you...stay away from renewable energy companies (Investment tips are for sarcastic purposes only. Blogger is not responsible for your money problems)
• Don't laugh, they think they are dying
• The Libertarian Party - where ex-Republicans go to get mocked
  

Un-Conventional

I didn't watch Barack Obama's acceptance speech last week and I have no intention to watch John McCain's this week. How people can get all giddy about such things is beyond me. What scares me the most is the hagiographic praise that is thrust upon these men (especially Obama). Why does it scare me? I think H.L. Mencken said it best:

"It is the popular theory, at least in America, that monarchism is a curse fastened upon the common people from above - that the monarch saddles it upon them without their consent and against their will. The theory is without support in the facts. Kings are created, not by kings, but by the people. They visualize one of the ineradicable needs of all third-rate men... and that is the need of something to venerate, to bow down to, to follow and obey."

As I said in a previous blog post, "creating myths around men who wield the power of government only distorts history and turns us into what John Adams feard - a nation of men, not of laws."

HT: Don Boudreaux for the Mencken quote.