The route is on. Long live the Internationale. Down with imperialism and her capitalist apologists.
On Oct 1, 1:56 pm, "M.A. Johnson" <[EMAIL PROTECTED]> wrote: > "In the early 1990s, Congress eased Fannie and Freddie's lending requirements > (to 1/4th the capital required by regular commercial banks) so as to increase > their ability to lend to poor areas. Congress also created a regulatory > agency to oversee them, but this agency also had to reapply to Congress for > its budget each year (no other financial regulator must do so), assuring that > it would tell Congress exactly what it wanted to hear: "things are fine." In > 1995, Fannie and Freddie were given permission to enter the subprime market > and regulators began to crack down on banks who were not lending enough to > distressed areas. Several attempts were made to rein in Fannie and Freddie, > but Congress didn't have the votes to do so, especially with both > organizations making significant campaign contributions to members of both > parties. Even the New York Times as far back as 1999 saw exactly what might > happen thanks to this very unfree market, warning of a need to bailout Fannie > and Freddie if the housing market dropped."An Open Letter to my Friends on > the LeftSteven Horwitz > Department of Economics > St. Lawrence University > [EMAIL PROTECTED] > September 28, 2008 > My friends, > In the last week or two, I have heard frequently from you that the current > financial mess has been caused by the failures of free markets and > deregulation. I have heard from you that the lust after profits, any profits, > that is central to free markets is at the core of our problems. And I have > heard from you that only significant government intervention into financial > markets can cure these problems, perhaps once and for all. I ask of you for > the next few minutes to, in the words of Oliver Cromwell, consider that you > may be mistaken. Consider that both the diagnosis and the cure might be > equally mistaken. > Consider instead that the problems of this mess were caused by the very kinds > of government regulation that you now propose. Consider instead that effects > of the profit motive that you decry depend upon the incentives that > institutions, regulations, and policies create, which in this case led > profit-seekers to do great damage. Consider instead that the regulations that > may have been the cause were supported by, as they have often been throughout > US history, the very firms being regulated, mostly because they worked to > said firms' benefit, even as they screwed the rest of us. Consider all of > this as you ask for more of the same in the name of fixing the problem. And > finally, consider why you would ever imagine that those with wealth and power > wouldn't rig a new regulatory process in their favor. > One of the biggest confusions in the current mess is the claim that it is the > result of greed. The problem with that explanation is that greed is always a > feature of human interaction. It always has been. Why, all of a sudden, has > greed produced so much harm? And why only in one sector of the economy? After > all, isn't there plenty of greed elsewhere? Firms are indeed profit seekers. > And they will seek after profit wherethe institutional incentives are such > that profit is available.In a free market, firms profit by providing the > goods that consumers want at prices they are willing to pay. (My friends, > don't stop reading there even if you disagree - now you know how I feel when > you claim this mess is a failure of free markets - at least finish this > paragraph.) However, regulations and policies and even the rhetoric of > powerful political actors can change the incentives to profit. Regulations > can make it harder for firms to minimize their risk by requiring that they > make loans to marginal borrowers. Government institutions can encourage banks > to take on extra risk by offering an implicit government guarantee if those > risks fail. Policies can direct self-interest into activities that only serve > corporate profits, not the public. > Many of you have rightly criticized the ethanol mandate, which made it > profitable for corn growers to switch from growing corn for food to corn for > fuel, leading to higher food prices worldwide. What's interesting is that you > rightly blamed the policy and did not blame greed and the profit motive! The > current financial mess is precisely analogous.No free market economist thinks > "greed is always good."What we think is good are institutions that play to > the self-interest of private actors by rewarding them for serving the public, > not just themselves. We believe that's what genuinely free markets do. Market > exchanges aremutuallybeneficial. When the law messes up by either poorly > defining the rules of the game or trying to override them through regulation, > self-interested behavior is no longer economically mutually beneficial. The > private sector then profits by serving narrow political ends rather than > serving the public. In such cases, greed leads to bad consequences. But it's > bad not because it's greed/self-interest rather because the institutional > context within which it operates channels self-interest in socially > unproductive ways. > This, my friends, is exactly what has brought us to the mess we are now in. > To call the housing and credit crisis a failure of the free market or the > product of unregulated greed is to overlook the myriad government > regulations, policies, and political pronouncements that have both reduced > the "freedom" of this market and channeled self-interest in ways that have > produced disastrous consequences, both intended and unintended. Let me > briefly recap goverment's starring role in our little drama. > For starters, Fannie Mae and Freddie Mac are "government sponsored > enterprises". Though technically privately owned, they have particular > privileges granted by the government, they are overseen by Congress, and, > most importantly, they have operated with a clear promise that if they > failed, they would be bailed out. Hardly a "free market." All the players in > the mortgage market knew this from early on. In the early 1990s, Congress > eased Fannie and Freddie's lending requirements (to 1/4th the capital > required by regular commercial banks) so as to increase their ability to lend > to poor areas. Congress also created a regulatory agency to oversee them, but > this agency also had to reapply to Congress for its budget each year (no > other financial regulator must do so), assuring that it would tell Congress > exactly what it wanted to hear: "things are fine." In 1995, Fannie and > Freddie were given permission to enter the subprime market and regulators > began to crack down on banks who were not lending enough to distressed areas. > Several attempts were made to rein in Fannie and Freddie, but Congress didn't > have the votes to do so, especially with both organizations making > significant campaign contributions to members of both parties. Even theNew > York Times as far back as 1999saw exactly what might happen thanks to this > very unfree market, warning of a need to bailout Fannie and Freddie if the > housing market dropped. > Complicating matters further was the 1994 renewal/revision of the Community > Reinvestment Act of 1977. The CRA requires banks to to make a certain > percentage of their loans within their local communities, especially when > those communities are economically disadvantaged. In addition, Congress > explicitly directed Fannie and Freddie to expand their lending to borrowers > with marginal credit as a way of expanding homeownership. What all of these > did together was to create an enormous profit and political incentives for > banks and Fannie and Freddie to lend more to riskier low-income borrowers. > However well-intentioned the attempts were to extend homeownership to more > Americans, forcing banks to do so and artificially lowering the costs of > doing so are a huge part of the problem we now find ourselves in. > At the same time, home prices were rising making those who had taken on large > mortgages with small down payments feel as though they could handle them and > inspiring a whole variety of new mortagage instruments. What's interesting is > that the rise in prices affected most strongly cities withstricter land-use > regulations, which also explains the fact that not every city was affected to > the same degree by the rising home values. These regulations prevented > certain kinds of land from being used for homes, pushing the rising demand > for housing (fueled by the considerations above) into a slowly responding > supply of land. The result was rapidly rising prices. In those areas with > less stringent land-use regulations, the housing price boom's effect was much > smaller. Again, it was regulation, not free markets, that drove the search > for profits and was a key contributor to the rising home prices that fueled > the lending spree. > While all of this was happpening, the Federal Reserve, nominally private but > granted enormous monopoly privileges by government, waspumping in the credit > and driving interest rates lower and lower. This influx of credit further > fueled the borrowing binge. With plenty of funds available, thanks to your > friendly monopoly central bank (hardly the free market at work), banks could > afford to continue to lend riskier and riskier. > The final chapter of the story is that in 2004 and 2005, following the > accounting scandals at Freddie, both Freddie and Fannie paid penance to > Congress by agreeing to expand their lending to low-income customers. Both > agreed to acquire greater amounts of subprime and Alt-A loans, sending the > green light to banks to originate them. From 2004 to 2006, the percentage of > loans in those riskier categories grew from8% to 20% of all US mortgage > originations. And the quality of these loans were dropping too: downpayments > were getting progressively smaller and more and more loans carried low > starter interest rates that would adjust upward later on. The banks were > taking on riskier borrowers, but knew they had a guaranteed buyer for those > loans in Fannie and Freddie, back, of course, by us taxpayers. Yes, banks > were "greedy" for new customers and riskier loans, butthey were responding to > incentives created by well-intentioned but misguided government > interventions.It is these interventions that are ultimately responsible for > the risky loans gone bad that are at the center of the current crisis, not > the "free market."The current mess is thus clearly shot through and through > with government meddling with free markets, from the Fed-provided fuel to the > CRA and land-use regulations to Fannie and Freddie creating an artificial > market for risky mortgages in order to meet Congress's demands for more > home-ownership opportunities for low-income families. Thanks to that > intervention, many of those families have not only lost their homes, but also > the savings they could have held onto for a few more years and perhaps used > to acquire a less risky mortgage on a cheaper house. All of these > interventions into the market created the incentive and the means for banks > to profit by originating loans that never would have taken place in a > genuinely free market. > It is worth noting that these regulations, policies, and interventions were > often gladly supported by the private interests involved. Fannie and Freddie > made billions while home prices rose, and their CEOs got paid lavishly. The > same was true of the various banks and other mortgage market intermediaries > who helped spread and price the risk that was in play, including those who > developed all kinds of fancy new financial instruments all designed to deal > with the heightened risk of default the intervention brought with it. This > was a wonderful game they were playing and the financial markets were happy > to have Fannie and Freddie as voracious buyers of their risky loans, knowing > that US taxpayer dollars were always there if needed. The history of business > regulation in the US is the history of firms using regulation for their own > purposes, regardless of the public interest patina over the top of them. This > is precisely what happened in the housing market. And it's also why calls for > more regulation and more intervention are so misguided: they have failed > before and will fail again because those with the profits on the line are the > ones who have the resources and access to power to ensure that the game is > rigged in their favor. > I know, my friends, that you are concerned about corporate power. So am I. So > are many of my free-market economist colleagues. We simply believe, and we > think history is on our side, that the best check against corporate power is > the competitve marketplace and the power of the consumer dollar (framed, of > course, by legal prohibitions on force and fraud). Competition plays mean, > nasty corporations off against each other in a contest to serve us. Yes, they > still have power, but its negative effects are lessened.It is when > corporations can use the state to rig the rules in their favor that the > negative effects of their power become magnified, precisely because it has > the force of the state behind it.The current mess shows this as well as > anything ever has, once you realize just what a large role the state played. > If you really want to reduce the power of corporations, don't give them > access to the state by expanding the state's regulatory powers.That's > precisely what they want, as the current battle over the $700 billion booty > amply demonstrates. > This is why so many of us committed to free markets oppose the bailout. It is > yet another example of the long history of the private sector attempting to > enrich itself via the state. When it does so, there are no benefits to the > rest of us, unlike what happens when firms try to get rich in a competitive > market. Moreover, these same firms benefited enormously from the regulatory > interventions they supported and that harmed so many of us. The eventual > bursting of the bubble and their subsequent losses are, to many of us, their > just desserts for rigging the game and eventually getting caught. To reward > them again for their rigging of the game is not just morally unconscionable, > it is very bad econonmic policy, given that it sends a message to other > would-be riggers that they too will get rewarded for wreaking havoc on the US > economy. There will be short-term pain if we don't bailout these firms, but > that is the hangover price we pay for 15 years or more of binge lending. The > proposed bailout cannot prevent the pain of the hangover; it can only conceal > it by shifting and dispersing it among the taxpayers and an economy weakened > by the borrowing, taxing, and/or inflation needed to pay for that $700 > billion. Better we should take our short-term pain straight up and clean out > the mistakes of our binge and then get back to the business of free markets > without creating an unchecked Executive branch monstrosity trying to "save" > those who profited most from the binge and harming innocent taxpayers in the > process. > What I ask of you my friends on the left is to not only continue to work with > us to oppose this or any similar bailout, but to consider carefully whether > you really want to entrust the same entity who is the predominant cause of > this crisis with the power to attempt to cure it. New regulatory powers may > look like the solution, but that's what people said when the CRA was passed, > or when Fannie and Freddie were given new mandates. And the very firms who > are going to be regulated will be first in line to determine how those > regulations get written and enforced. You can bet which way that game is > going to get rigged. > I know you are tempted to think that the problems with these regulations are > the fault of the individuals doing the regulating. If only, you think, Obama > can win and we can clean out the corrupt Republicans and put ethical, > well-meaning folks in place. Think again. For one thing, almost every > government intervention at the root of this crisis took place with a > Democratic president or a Democratic-controlled Congress in place. Even when > the Republicans controlled Congress, President Clinton worked around it to > change the rules to allow Fannie and Freddie into the higher-risk loan > market. My point here is not to pin the blame for the current crisis on the > Democrats. That blame goes around equally. My point is that hoping that > having the "right people" in power will avoid these problems is both naive > and historically blind. As much as corporate interests were relevant, they > were aided and abetted, if unintentionally, by well-meaning attempts by > basically good people to do good things.The problem is that there were a > large number of undesirable unintended consequences, most of which were > predictable and predicted. It doesn't matter which party is captaining the > ship: regulations come with unintended consequences and will always tend to > be captured by the private interests with the most at stake. And history is > full of cases where those with a moral or ideological agenda find themselves > in political fellowship with those whose material interests are on the line, > even if the two groups are usually on opposite sides. This is the famous > "Baptists and Bootleggers" phenomenon. > If you've made it this far, I am most grateful. Whether or not you accept the > whole argument I've laid out here, I do ask one thing of you: the story I > told at the start of the role of government intervention in this mess is > true, whatever your grander conclusions about the causes and cures are. Even > if you don't buy my argument that more regulation isn't the cure, to blame > this mess on "the free market" should now strike you as an obvious falsehood > and I would hope, in the spirit of fair play, that you would stop making that > claim as you speak and write about the ongoing events of the last two weeks. > We can disagree in good faith about what to do next, and we can disagree in > good faith about the degree to which government intervention caused the > problems, but blaming a non-existent free market for a crisis that clearly > wasto some extentthe result of government's extensive interventions in that > market is unfair. So if I have persuaded you of nothing else, I hope deeply > that I have persuaded you of that. > In the end, all I can ask of you is that you continue to think this through. > Explaining this crisis by greed won't get you far as greed, like gravity, is > a constant in our world. Explaining it as a failure of free markets faces the > obvious truth that these markets were far from free of government. Consider > that you may be mistaken. Consider that perhaps government intervention, not > free markets, caused profit-seekers to undertake activities that harmed the > economy. Consider that government intervention might have led banks and other > organizations to take on risks that they never should have. Consider that > government central banks are the only organizations capable of fueling this > fire with excess credit. And consider that various regulations might have > forced banks into bad loans and artificially pushed up home prices. Lastly, > consider that private sector actors are quite happy to support such > intervention and regulation because it is profitable. > Those of us who support free markets are not your enemies right now. The real > problem here is the marriage of corporate and state power. That is the > corporatism we both oppose. I ask of you only that you consider whether such > corporatism isn't the real cause of this mess and that therefore you > reconsider whether free markets are the cause and whether increased > regulation is the solution. > Thanks for reading. > Stevehttp://myslu.stlawu.edu/~shorwitz/open_letter.htm --~--~---------~--~----~------------~-------~--~----~ Thanks for being part of "PoliticalForum" at Google Groups. For options & help see http://groups.google.com/group/PoliticalForum * Visit our other community at http://www.PoliticalForum.com/ * It's active and moderated. 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