Failed Ideology

Sent to the Raleigh News & Observer

In advocating Obama's stimulus package, Paul Krugman takes another swing at Milton Friedman by comparing Friedman's monetary theory to the fiscal policy theory of John Maynard Keynes (i.e., large-scale deficit spending by government). Krugman says that “[t]he failure of monetary policy in the current crisis shows that Keynes had it right the first time.” This does not logically follow, however, because the failure of one theory cannot prove the validity of another. Maybe both theories are wrong.

The evidence showing that the large-scale government spending of the 1930s did not get us out of the Depression should show that Keynes' theory was flawed. Claiming, as Krugman has done in the past, that it was the massive spending during World War II that ended the Depression is a flawed notion as well because a command-and-control economy of rationing, price controls, and military production is not economic prosperity. In fact, it wasn't until the dramatic drop in spending after war that the economy got back to normal.

Krugman has claimed that it was a failed ideology that got us into the current situation. I’m afraid that Krugman’s ideology may make matters even worse.

Whatever

• So, why should I believe him now?
• Radley Balko has some good incites into the recent McCain/Obama debate
• The Dark Knight/Toy Story 2 Mashup
• Earth from above
• Markets in everything
• Old school Star Wars
• Credit crunch? What credit crunch? Maybe it is only the big, "well-connected" banks that need help. The sky is not falling.
  

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.

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
  

"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 impedance mismatch between the wishes of planners and the reality on the ground. "The dirty secret of clean energy is that while generating it is getting easier, moving it to market is not."
• Government bailouts work both ways it seems. One of the big problems with this trend is that it won't be true privatization, and in a few years unfettered capitalism will take the blame.
• On Biden
• What's that old line about doing the same thing over and over again and expecting a different result?
• Andy, Fannie, and Freddie
  

Big Government is Big Oil

I sent the following to the Raleigh News & Observer:

Tuesday's front page story entitled “Big Oil spends to jack up stock” scrutinized international oil companies for business decisions made with their earned revenue. I was wondering if that same scrutiny will be used to examine the expenditures of those entities that control roughly 90% of the world's proven oil reserves. I am, of course, referring to governments around the world. I am not going to hold my breath, however, because we all know that expenditures on socialistic welfare programs are beyond scrutiny, while any form of profit is per se evil.

It is ironic that the term “Big Oil” is applied to entities that are puny in comparison to those that actually control oil. In reality Big Government is Big Oil.

Here are some examples of Big Government mismanagement of oil.

The original article that I am replying to is pretty sensationalist to begin with. It is obviously trying to stir up some controversy around how oil companies disperse their profits.

What is the proper distribution of revenue? Hell if I know. But if the oil companies are making the 'wrong' decisions then profits won't be a problem for them in the future, and idiot reporters won't have to worry about writing sensationalist claptrap.

Whatever

• Just avoid smalltalk all together
• It's always fun to watch central banks blame their ineptitude on businesses
• How to stop a sequel
• Servitude is coming back into fashion. "I solemnly swear that I will never take part in any involuntary civilian service at the behest of the federal government, regardless of the consequences."
• Maybe this technology would be cost effective (i.e., profitable) if water prices were allowed to reflect reality
• A Nudge to fix the wrong problem