Thoughts on economics and liberty

Tag: Monetary and financial system

Stefan Molyneux’s deep insight into the regulatory environment of banks

I heard an excellent talk by Ian Harper a couple of years ago on the regulatory issues surrounding the financial crisis. That talk explored the failure of regulation to ensure that securitised mortgages properly disclosed the quality of their contents.  

But there's something deeper and more profound that's been going on in the banking sector, something that better explains the incentives that drove banks to take unwarranted risks. Stefan's talk is eye opening.

Once again – and this is something that Stefan repeatedly notes, these problems are the outcomes of the rules established by governments. The natural evolution of banks through free markets led to enormously greater security and prudence. The sum and essence of the modern regulatory regime for banks has become: privatise profits, socialise losses. Given such rules, banks will take risks. 

The solution, as the following picture (circulating on FB) says, is to let banks fail – BUT (and this is more important, given Stefan's talk) ensure that bank owners are made PERSONALLY liable for bank failures.

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If you STILL believe that capitalism caused the financial crisis, then read this

For those who are still in denial about the MASSIVE GOVERNMENT FAILURE involved in the recent events in USA, please read this:

Letters to the Editor
Watertown Times
260 Washington St.
WatertownNY 13601

In his letter of October 23 [2011] criticizing George Will’s column on Elizabeth Warren, Mark MacWilliams of Cantonrepeats a number of fallacies about the recession and financial crisis that should not go unchallenged.

MacWilliams refers to Congress deregulating the financial industries but offers no specifics. In fact, since 1980, Congress has passed four new sets of regulations for every one deregulatory act, and between 2001 and 2008, there were nine new sets of regulation and not one bit of deregulation. Those recent regulations included the Basel capital requirements, which created powerful incentives for banks to sell off the mortgages they originated and buy them back as mortgage backed securities, which they otherwise would not have done.

Contrary to MacWilliams, our current mess was not the result of “predatory capitalism,” but the predictable consequence of government intervention and crony corporatism. 

Nowhere does he mention the Federal Reserve’s role in pushing interest rates so low that banks were being paid to borrow, nor does he have a word to say about Fannie Mae and Freddie Mac having privileged access to the Treasury to buy up all of the questionable mortgages that banks originated. He also ignores two decades of Congress’s role in mandating that banks lend to marginal borrowers.

If all the traffic lights in Watertown were stuck on green, we’d hardly blame the drivers for the ensuing accidents. 

When government distorts the signals and incentives facing producers and consumers, the blame for the resulting disaster should fall on government not the private sector. The crisis and recession are what happens when you put “people before profits.”

Finally, MacWilliams should learn who does assure that his toaster doesn’t explode by actually looking at it. He’ll find the stamp of not a government agency, but Underwriters Laboratory, a private firm that provides quality assurance for appliance makers and consumers. Unlike the government cartel of financial rating agencies that failed miserably last decade, the privately operated UL has decades of success behind it.


Steven Horwitz

And don't forget to read my article here:

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Mr George Soros, please go back to the drawing board

On 28 April 2011 George Soros wrote an article entitled, "Why I agree with (some of) Friedrich Hayek". Only problem, he just doesn't understand Hayek. He starts his essay by saying:

Friedrich Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources — as long as the government doesn’t interfere. It is a formalized and mathematical theory, whose two main pillars are the efficient market hypothesis and the theory of rational expectations. 

This is usually called the Chicago School, and it dominates the teaching of economics in the United States. I call it market fundamentalism.

But neither did Hayek EVER claim that there was no role for the government (quite to the contrary: he was a classical liberal in every sense of the word) nor did he formalise his model (although a mathematical proof has indeed been produced recently: here).

Far from being a 'market fundamentalist' he wrote in The Road to Serfdom:

Probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rough rules of thumb, above all the principle of laissez faire.

If Mr Soros pays serious attention to (and understands!) Hayek's work, the world could become a better place as Soros would then presumably spend his money to propagate sensible ideas.

Instead, Soros has 'invented' a theory of "reflexivity" to explain booms and busts, which he is propagating at great expense. The problem with his theory is that, like Na ssim Nicholas Taleb's Black Swan theory, it displays little or no understanding of the most important driver of booms and busts – namely, bad government regulation and improper intervention including in the monetary system. For instance, Hayek advocated private money. That would eliminate 80% of the world's macro-economic problems (assuming it was regulated for prudence). 

Further, his concept of "reflexivity" is nothing but a glorified version of tâtonnement that is the natural process of 'over-shooting' of prices before the 'true' price is found (which is momentary, anyway). Since prices are constantly changing in the free market to reflect changing demand and supply, the idea of a 'true' price is meaningless. This kind of so-called 'overshooting', incidental to the natural market process, is not a worry so long as it is determined by private market participants who are genuinely trying to apply their mind to advance their self interest, taking account of their own unique and specific local circumstances.

The problem only arises when the government steps in to distort and amplify these market explorations. Governments frequently interfere with free choice or hide vital information so as to deliberately mislead the market (such as by creating a Fannie May that sells bonds which are falsely perceived by the market to be of greater value than they are. Such fraudulent behaviour of governments – WHICH IS VERY COMMON! – is far more problematic than potential confusion in the minds of some market participants; confusion that balances out in most cases and is entirely harmless to the society). Similarly, the over-investment in capital assets promoted by central banks that keep interest rates artificially low is another typical cause of booms and busts.

Thus, government failure is the PRIMARY cause of booms and busts. Let Mr Soros consider this basic truth deeply.

Mr Soros is, as yet, a novice economist. He should go back to the drawing board and ask a lot of questions. That he has at least heard about Hayek is a promising start. Now he should start opening Hayek's books and look around.

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Bad policy has real consequences

Bad policy, of the sort promoted by Keynesians including Alan Greenspan (whom we better know as a turncoat – a one time votary of free banking but who, on gaining the power over billions of people through his role as Chairman of the US Federal Reserve, lowered interest rates in USA to allow a splurge in bad borrowing to occur), has real consequences.

As I outlined clearly in my posts/articles on this subject, the housing bubble was ACTIVELY PROMOTED by bad policy that has a long history in USA (e.g. see this + many other posts here).

The consequences are now clear, as this article from The Economist illustrates. There is NO FREE LUNCH. All bad policy amounts to stealing money from someone and giving to another. That destroys the entire economic system.

Alan Greenspan can take credit for having chaired the collapse of America.


TO THE many dubious distinctions of Las Vegas, add one more: foreclosure capital of America. People who have managed to hold onto their homes are far from lucky: property prices are around 60% below the peak they reached in 2006, leaving 70% of homeowners in the area owing more on their mortgage than their property is worth. (Nationally, the proportion of homes that are “under water” is a still-awful 23%.)

All this makes Las Vegas the most extreme example of the many cities in America’s sunbelt that grew rapidly thanks to the cheap and abundant credit of recent decades, only to suffer fearsome property crashes during the subprime crisis and the ensuing recession.

The signs of the crash are everywhere in Las Vegas. The city’s outer suburbs are eerily quiet, thanks to the preponderance of unsold and foreclosed homes. There are few lights in any windows, and few cars on the roads. Banners and boards advertising hugely discounted housing flap and rattle mournfully in the desert wind. In North Las Vegas every second house on some streets carries a “For Rent” sign, offering rates of as little as $150 a month. One or two houses on each street have been boarded up and abandoned. 

the value of homes near foreclosed properties falls faster than the market as a whole.

– dire effect on local governments, which tend to rely on property taxes for much of their revenue. Clark County, which includes Las Vegas, expects its take from property taxes will fall by over a fifth this year. The problem is all the more severe since demand for the services the county provides has risen amid the downturn. Local authorities also end up picking up the pieces when developers go bust or homes are abandoned, leaving fees unpaid, infrastructure to be completed and property to maintain.

All of this ripples through the local economy. The construction business, once a mainstay, has withered. Local governments are trimming their staff.

– high levels of foreclosure tended to drag down not just investment in property but also car sales.

– Moving house can cut people off from their friends, churches, schools and community groups.

– Many have lost their homes because they have lost their jobs. All this leaves them isolated and depressed. And that can lead to drug and alcohol abuse, domestic violence, juvenile delinquency and so on.

– A 2009 survey of Latino families around the country whose homes had been foreclosed had similar findings: amid the stress, marriages broke down; family members fell out; children’s academic performance suffered.

God bless America and its mad Keynesians. I can't see anyone out there who knows how to save America.

I'm sure those who have lost their jobs, houses, spouses, and are into drugs and alcohol are thanking Greenspan.

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