The Good Old Days

The following was sent to the Raleigh News & Observer:

Paul Krugman is pining for the old days when the banking industry was boring. His analysis is flawed, however, because the New Deal Era regulations were changed, not because of some conspiracy, but because they were dysfunctional in the face of 1970s inflation.

One aspect of the regulations limited what banks could pay out as interest on deposits. In an era when prices are rising 10% a year, a bank paying out 3% can't compete with other investments. It was the Carter Administration (yes, the Carter Administration) that first acted to undo the vaunted New Deal regulations allowing more competition among financial institutions.

The current regulatory environment may not be optimal, but going back to a highly regulated system isn't the panacea that we are being sold.

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.
  

Whatever

• Mark my words: the next bubble in the economy will be centered around 'green' technology. Green will be the dot-com of the next decade.
• At least you will be able to enjoy your losses
• Hey, I may be the center of the universe (ok, you may be too)
• The first portable GPS device
• The housing bubble easily understood
• Health care in the U.S. vs in the U.K.
• Homeland Security detects terrorist threats by reading your mind. They probably don't want to be reading the minds of the barefooted, personally violated people waiting in the long lines at the airport.
• “Our advice to drivers is not to panic and not to top off their tanks.” I hate to tell you this, but higher prices work better.
  

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
  

"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.

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
  

Whatever

• Obama wants to tax (i.e., reduce) the production of and subsidise (i.e., increase) the demand for oil. People, this is not hard: reducing the supply of or increasing the demand for a good, ceteris paribus, means the price will increase. Encouraging both as a plan to ease higher prices should be a sign of insanity (or political prowess).
• What's the big deal? We weren't using the Fourth Amendment anyway.
• Oooh! LHC is sexy (in a sciency sort of way)
• An interesting video explaining why, even if you are 100% innocent, you should never talk to the police (HT: Bruce Schneier)
• I agree with Perry's comment at the end of this blog post, but it won't be long before it is considered anti-social
• More significant than the iPhone?? How dare you say such things!
• The food industry, in an effort to avoid dealing with a problem itself, calls for more regulation. "More important than the financial loss is the loss of consumer confidence," says an industry representative. Well, getting consumers confident in your product is a cost you should have to bear. Calling for government to regulate makes you sound noble, but it has the added "benefit," I'm sure, of pushing out marginal competitors.
• Don't think that raising the minimum wage had no part is bringing this and this about
  

Whatever

• I love this idea of "competing" tax plans. It's like competition between McDonald's and Burger King - the differences are marginal and they both suck.
• Oooh, save me from Google, I'm so oppressed
• Jason Kuznicki does a great job at debunking the idea that the recent Supreme Court decision regarding Habeas rights will lead to a "flood" of lawsuits. And here is some good stuff from George Will, as well.
  
• The Web Time Forgot (annoying, free registration may be required - try BugMeNot)
• Is labeling menus with nutritional content a good idea? Maybe not.

Whatever

• Hmmm...and they wonder why businesses must pay extortion money to politicians
• Ok, but what if you are both?
• When I saw this I nearly ruined my keyboard with drool
• Ok, maybe this is a little too much Star Wars for one post...nah! There can never be too much Star Wars!
• The corrupting influence of rock and roll
• You can bury me in the R2-D2 DVD player
• Don't ever try to do something nice for a stranger. It may be illegal. (HT: Coyote Blog)
  
• Stupid people shouldn't be activists (HT: Dispatches from the Culture Wars)
• This says it all (HT: Carpe Diem)
  

Solutions that aren't

Why do I not look to government to solve environmental problems? Two recent news items should help explain.

First, Time Magazine is reporting on the disaster that is ethanol.

Even cellulosic ethanol made from switchgrass, which has been promoted by eco-activists and eco-investors as well as by President Bush as the fuel of the future, looks less green than oil-derived gasoline.

...

[T]he basic problem with most biofuels is amazingly simple, given that researchers have ignored it until now: using land to grow fuel leads to the destruction of forests, wetlands and grasslands that store enormous amounts of carbon.

What has been a dirty little secret for years is finally becoming common knowledge. Yet, we still subsidize and encourage ethanol production.

The second item appeared today in the Raleigh News & Observer and deals with the disposal of Compact Fluorescent (CF) light bulbs (those new bulbs that you will be forced to purchase in a few years).

Disposal options: Don't throw fluorescents in the trash. The light will break and release mercury. In a landfill, it could contaminate the ground. If you must throw a burned-out CFL into the trash, seal it first in two plastic bags to prevent leakage.

The preferred method is to take CFLs to a recycling facility or hazardous waste facility.

So let me get this straight, I'm not supposed to dispose of the bulbs in the usual way because I will be contaminating the environment with mercury. Instead, I should drive to a central recycling facility to dispose of these bulbs, thereby contaminating the environment with carbon dioxide from my car.

Whatever!