It seems some folks try to have it both ways when talking about “the market.” They are right to remind us that “the market,” so beloved of free-market types, does not simply exist in a state of nature. Much of the extended market order is enabled — even constituted — by rules that define property and regulate the terms of exchange. Many of these rules are created and/or enforced by government. If markets were “out there” in the wild, just being all efficient and stuff, the poverty of humanity down through history would be completely vexing. This is just neo-institutionalist economics 101, and I’m down with it.
In particular, the American economy is so far from textbook laissez faire that it is well-nigh-impossible to find a breakdown in market institutions that does not have some bit of government policy as a chief contributing cause. As I said in an earlier post on a similar theme, “The American economy is in fact a byzantine amalgam of market and state institutions enmeshed in a thicket of regulation.” So when part of it goes KAPUT it’s cheap to blow ideological notes on the trumpet of market failure, especially if you’re the sort of person who likes to go on and on about how advanced markets cannot even exist except within the framework of government law.
If you doubt the centrality of the government side of this, let me give you James Pethokoukis:
The more you look at the history of the housing-spawned credit crisis, the more you notice Uncle Sam popping up, Zelig-like, in every scene. Fannie Mae and Freddie Mac were government-birthed entities that decided to buy securities tied to subprime loans. And it was government officials on Capitol Hill, the recipients of millions in campaign donations from the F&F lobby, who decided not to rein in those entities. You had the government ‘ s Community Reinvestment Act nudging banks to make unsound loans. Government banker Alan Greenspan pushed interest rates too low for too long earlier this decade, creating an extreme financial situation that made the crazy Wall Street strategies look temporarily reasonable. And for decades, government has pushed higher homeownership as a national goal, via F&F as well as through the tax code, siphoning off resources that might have been better devoted to other economic sectors.
And now, folks like Barney Frank pretend government just showed up on the accident scene moments ago like an innocent passerby who wonders aloud, “Anyone here know what happened? Anyone?” I mean, how can we try to prevent future financial crises, or least minimize their damaging effects, if we delude ourselves on the causes of the current one?
We’re seeing the apocalyptic failure of some huge markets. Yes, those markets have failed. And those markets are what they are because government made them what they are. We need better markets, and therefore we need better government. I can’t say exactly what that means at this point, but surely Sarah Palin can.
The new bail out plan is severe interference in american culture and will not work
http://www.berninger.de/blog-posts/blog-single-…
The markets are what they are because Wall Street Cowboys and their financial institutions got every single thing they wished for. From the revoking of the Glass -Steagall Act (Gramm-Leach-Bliley Act), to the ability to make complex completely opaque financial instruments via Commodity Futures Modernization Act ( turning markets into nothing more then a complex pyramid scheme) to people in high places like the fed , the treasury and the Credit rating agencies all doing their bidding for cheap credit, massive cash infusions and stonewalling of any oversight or transparency of what they were doing in the shadows.
They got to keep all the profits (at only 15% tax rate) and were big time capitalist when they were making billions stealing from the productive economy and when their house of cards came tumbling down they got all their debts to be socialized ( apparently $5 trillion dollars worth).
No they got markets in my government… corporatist in my government. They've broken it, robbed us blind and proved to some that indeed government doesn't work.
So, does any of this regulatory capture make you hesitate at all in proposing even more regulation?
The logic of Will's neo-institutionalist point is that there is no such thing as “more regulation,” so no one can coherently be for or against it.
The MBS debacle is probably over 98% related to the market. No one was forcing those financial institutions to make all of those subprime mortgages and packaging them into securities to be sold to investors. No one was forcing investors to buy them. Everything was predicated on the widespread belief that housing prices wouldn't fall more than 5%. Well, when you get a highly leveraged boom and prices fall more than 5%, the financial institutions freeze up. This is purely free-market phenomenon and blaming it on low interest rates from the Fed is not being serious.
Is that a serious question? We didn't properly regulate them and now we've taken on huge debt and massive exposure to their bad paper . Yeah that's a clear argument to regulate them in the first place and practice prudent financial planning for the people of America rather then giving into every whim of the Wall Street Cowboys.
The question should be are YOU happy we are bailing them out to prevent financial collapse because we chose to deregulate these baboons and let them run wild over our economy?
“We didn't properly regulate them and now we've taken on huge debt and massive exposure to their bad paper . Yeah that's a clear argument to regulate them”
No, it's not clear. A lot of economists suggest that FED shouldn't have done this in the first place. It's a bad signal and encourage this companies to make more risky investiments, because they know that they are 'too big to fail'. Maybe it's locally optimal, but creates bad incentives for the future.
I'll take that as a “No.”
I'm very unhappy we are bailing them out, and with the existing quality of regulation. But, probably for different reasons than you are.
I think there's a difference between the market and merchant/producer capitalism. The former may exist in a primitive society, but the latter owes itself to institutions and so forth as outlined by Douglass North. But markets have always existed where exchange was necessary.
I think there's a difference between the market and merchant/producer capitalism. The former may exist in a primitive society, but the latter owes itself to institutions and so forth as outlined by Douglass North. But markets have always existed where exchange was necessary.