Ideal Government vs. Possible Government

I'd like to focus on the economy. I don't know much about it, so your enlightenment is much appreciated.

Greenspan was at the forefront of our economy for ages. He supposedly created a "bubble" in the housing market by implementing deregulation. Is deregulation really good in America? Ayn Rand did state that philosophical revolution would need to occur before political revolution. I would love to see the government exit all private business affairs, but is it really possible when there are so many corrupt/stupid individuals?

When I attempt to answer this, I can't help but wonder why the banks were giving all their money away in the first place. It seems like the banks' inability to regulate their own trade may have caused this whole mess. If so, then this recession is probably teaching them a lesson - which might be a philosophical revolution.

Post 1

Tuesday, December 16, 2008 - 1:15pm

Hi Louis,

Greenspan contributed to the bubble by keeping interest rates artificially low. But the bubble also came from the laws passed that pushed lenders into making the subprime loans. The lenders did so because they could then sell those dogs to Fannie and Freddie who were creatures created by legislation and ruled by regulations. Banks have long been one of the most highly regulated industries. Here is a link to a post I made not long ago regarding the bubble.

I agree with Rand that without an education, the electorate would not be able to sustain a really free society even if it were to magically appear. I believe we need to move forward in both areas at the same time. The philosophical education, and its implementation.

You said, "I would love to see the government exit all private business affairs, but is it really possible when there are so many corrupt/stupid individuals?" A proper government would be one that defended individual rights - they would never exit from any private action that involved fraud, initiation of force, the threat to initiate force, or theft. When you take away the ability to use fraud, theft and force, the corrupt are no longer able to harm others. As to stupidity, some people believe that the intelligent should be partially enslaved in order to support the stupid - I'm not in agreement with that. What I can say is that a truely free society would be a more benevolent environment and offer more opportunites for everyone to reach towards achieving the best they could.

Post 2

Tuesday, December 16, 2008 - 3:07pm

I agree with Steve Wolfer, but have a minor correction. A significant share of mortgages were not bought by Fannie Mae or Freddie Mac. They were bundled, then many sliced and diced into collateralized securities by commercial banks or investment banks, then sold to other investors, many of them foreign. However, I have read that Fannie and Freddie invested in some tranches of collateralized mortgage-backed securities containing mortgages that did not meet Fannie's or Freddie's criteria for "conforming" mortgages. Many mortgages, often called "jumbo mortgages", are nonconforming per Fannie or Freddie because they are too large (reference).

Regarding deregulation, it was done not by Greenspan, but by Congress. The most significant part of it pertaining to the mortgage crisis is described here.

(Edited by Merlin Jetton on 12/16, 4:57pm)

Post 3

Tuesday, December 16, 2008 - 5:35pm

Steve, nice point. Rates were artificial, and subprime loans were being thrown at the lenders - my father is a mortgage broker, so I saw a lot it.

As for deregulation, would you implement it now? If so, how would it look? If not, then why?

Post 4

Tuesday, December 16, 2008 - 8:02pm

Greenspan was at the forefront of our economy for ages. He supposedly created a "bubble" in the housing market by implementing deregulation.

Yes, he was at the forefront, but it had nothing to do with deregulation. He significantly increased the Fed's lending/inflation. He was once associated with Rand, but I don't think I've heard him say or seen him act in a capitalist way. Rand would surely rebuke him. He is not a capitalist nor does he follow (or understand?) objectivism.

Just to clear things up a bit.

Edit: I'd highly recommend reading about capitalism, particularly from Objectivist authors. You will primarily see two definitions. One is the socialists saying capitalism is an evil money based trading/taking advantage of others economic system. The other is the objectivists saying capitalism is a minimalist form of government where the only purpose of government is to protect the lives and property of of innocent civilians, where exchange of values (trade) is mutually consensual.

http://www.capitalism.org/

http://objectivism101.com/IOP/Politics_Capitalism.html
(Edited by Dean Michael Gores on 12/16, 8:09pm)

Post 5

Tuesday, December 16, 2008 - 11:35pm

Louis,

There are problems when an area is partially regulated and partially free. Much of our economy is in that condition. The health or stability of such an area is more accident than natural. When a change is made, whether to increase the amount of regulation, decrease the amount of regulation, or just change the regulations, the results are often not easy to predict. When people talk about deregulation it is important to remember that it was only partial deregulation of some areas of the economy. There are two acts of deregulation that are spoken of in relation to the current crisis. One is that act that Merlin refers to in his post above. It was very necessary for two reasons - banking and money handling in general was going digital, the economy needed more flexible ways of structuring financing than could handled just through banking, and we were moving into the global economy in the world of finance. If the degree of freedom to restructure financial institutions hadn't been done, we would have had serious problems. It would have been like going into the automotive era but with regulations that were only suitable for making horse-drawn carriages. The other act of deregulation that is relevant was when Fannie and Freddie were converted from government owned to privately owned (but still government controlled via regulation). I don't see deregulation as causing our current problems.

In terms of the economy I see two problems to be addressed. The first is to get us out of this credit contraction as quickly as possible - the longer we are in this depressed state the more damage is done. For that problem the best fix would be a massive reduction in taxes and regulations that burden businesses. This would open up profits for them not just here at home but make them profitable in the global economy. Our government keeps regulating and taxing nationally, forgetting we trying to compete in a global economy. The second problem is fixing how government is run such that they cannot modify the supply of money or create an artificial price of money (interest rates). We need a gold standard and an end to the federal reserve system. Banking need to be private and regulated only as needed to protect against fraud. This would force congress and the administration to live within their means and keep them from doing damage to the economy that comes from fiat currency or credit supply - no more giant bubbles, no more credit collapses, no more massive deficit spending, no more debt so large it can only be paid over generations, if at all. After we get out of the crisis, and after the money supply and interest rate are taken away from the government, then the process of deregulation could be continued.

Post 6

Wednesday, December 17, 2008 - 1:43am

Steve:

Your proposals for addressing our economic mess are way to complicated. All we have to do is lower the federal lending rate to under 0.25%! See how easy that was. Watch next week as everything starts to improve dramatically in response to this bold move. :-) (Just kidding, for the humor impaired.)

My favorite line in the news this week was the ominous statements, repeated over and over, that lowering the interest rate effectively to zero didn't mean that the Fed was out of "tools" to "fix" the economy. These unspecified "tools" should give everyone in business a nice warm feeling and increase confidence in planning for the future.

Now all we have to do is sit back and wait for Dr. Stadler to pull the lever.

Post 7

Wednesday, December 17, 2008 - 9:47am

Jeff,

Exactly. It's very difficult to make plans that involve significant risk. People have to read the tea leaves of the Federal Reserve and Treasury Department now.

Jim

Post 8

Saturday, December 20, 2008 - 6:01am

Jim:

"Exactly. It's very difficult to make plans that involve significant risk. People have to read the tea leaves of the Federal Reserve and Treasury Department now."

I enthusiastically second that, I think that nails it. I think of it as an odd corollary to Gresham's Law; crappy carcass carving borrowers have displaced beast building risk takers in our economies. Few sane risk taking beast builders are willing to risk their own future skin in the insane free-for-some that is going on. Therefor, our economies today got plenty of exactly what they don't need more of(carcass carvers), and little of what they need desperately(beast builders.)

Not because the beast builders have lose confidence in themselves, or their ability to assess risk, but rather, in the sanity of the tribe. Perhaps it is precisely their ability to accurately assess risk that is keeping them far from the current tribal CF.

To be a risk taking beast builder in economies dominated by carcass carvers, where success is defined by proximity to a government monopolist with a gun in our current free-for-some, is to volunteer to be eaten and ridden.

This is not exactly the romantic 'Atlas Shrugged' imagined by Ayn Rand, but it is close enough to a practical version of it. The real version provides far less hope for our future than her romantic version, but that precisely defines romantic literature.

As described by the WSJ, the 'rope pushers' in DC (hard to call them 'string pullers' with the dismal results they are achieving) are complaining that they threw all this money(at a tiny handful of institutions)and 'the banks aren't lending.'

Well, not exactly true. The banks aren't lending under the old tear-off credit rules. We're back to the future, the old conservative lending rules. The 'high credit scores' that Congress laments as being the only scores getting loans these days realize those credit scores by not being drunken sailors with credit, so their plan to reinflate the credit bubble has a giant hole in it. The vote buying monopolists with guns are trying to re-inflate an artificial credit bubble, and also aren't getting that it is exactly their fatfingered lurchings in our economies that is killing the confidence that once fed that waterfall of credit at the backwash credit window that enabled that credit bubble. They just want the credit bubble back, period, and their hopes are hanging on 'things are worse eleswhere' to keep that backwash credit window flowing. Meanwhile, they will see what they can do about that 'things are worse elsewhere' thin ice.

Or, maybe their lurchings in our economies are not even thought through even that far, they are in fact just 'doing something.'

They are frantically clinging to their gig, and they have access to all the guns and printing presses necessary to cling to a bitter end. They will bring the nation to its knees before letting go of their power to rule over the CronyFest on the Potomac, because that is what tribes running amok do.

To which a frantic, bewildered, and shell-shocked nation demands, 'more concentrated power in DC, please!'

The tribe is sprinting, building up speed, heading us all off a cliff, in exactly the wrong direction. It is pure Madness of Crowds. There is only one sane thing to do in these times, and that is, get the Hell out of the way.

regards,
Fred

Post 9

Saturday, December 20, 2008 - 6:48am

Steve:

"The other act of deregulation that is relevant was when Fannie and Freddie were converted from government owned to privately owned (but still government controlled via regulation)."

The abomination 'GSE' was neither 'private' not 'public'; it was a clearly fascist element, a melding of business with the guns of government. It makes no difference what the well intentions were, America tolerated fascism. The resulting monopoly with guns was instrumental in creating this latest constructivist meddling mess.

FNMA/GNMA/FHA GSEs were SEC EXEMPT/AGENCY RATED.

They were not free market entities. They were lies on paper, and by that I mean, the obvious lies of "THESE SECURITIES ARE NOT BACKED BY THE US GOV'T" Wink WInk.

Of course they were backed by the US Gov't. What did we just do, if not explcitely back them? That was exactly the implied 'infinitely backed' glow behind anything they touched that enabled this mess. SEC EXEMPT. AGENCY RATED securities. These GSE's may have been fascistly 'privately owned', but were not free market entities. They were fascist entities, empowered by the guns of government.

The poisen, 'securitized mortgage bundle' does not exist without the imprimatur of SEC EXEMPT/AGENCY RATED FNMA lurching about in our economies.

The over-riding of 50 more stringent sets of state banking regulations does not occur without the fatfingered federalism of SEC EXEMPT/AGENCY RATED FNMA/FHA.

Let's argue that the intent of the FNMA/FHA mission space was well intended; it makes no difference, if that intent was used to fatfinger a monopolistic, single point of failure experiment on all of our economies, nationwide. The apolitical enemy of all of us is precisely monopolistic/concentrated power single point of failure national experiments impressed at the point of a gun.

The nature of the failed experiment was as follows. Originally, the FHA mission space was to enforce fair lending and banking laws as they relate to the administration of mortgages through FHA/HUD/FNMA/GNMA. That involved, setting the rules for access to federal mortgage money, and then detecting and policing and enforcing actual instances of violations of those laws. So far, a totally legitimate function of federalism, ie, concentrated force directed at regulating commerce, to make it regular, under laws, as part of its well meaning goal of enhancing home ownership in the nation.

But, somewhere between its well intentioned beginnings and the 60s/70s/80s/90s and today, enforcement on a per instance basis was inevitably decreed to be 'too hard', and instead, a policy based on broad demographic numbers/outcomes -- including, demographics classed by income -- period, substantially replaced the 'per instance' enforcement focus. The FHA enforcement provision de-emphasized 'per instance' enforcement, and simply focused on the finish line as de facto evidence of instances of unfair lending practices-- based purely on the number of loans banks were giving to people with low incomes, as part of that blanket demographic indictment of banking and lending.

Banks falling under these federal regulations, which increasingly were used to push aside more stringent state banking regulations in court case after court case and even supreme court case, had no choice but to embrace the federal 'tear-off' credit rules, or be in de facto violation of the demographic based outcome metrics.

So, banks and all kinds of enabled lending institutions saluted smartly, and folks like CountryWide were doing God's Work and waving the American Flag when they were aligned, shoulder to shoulder, with FNMA in the new tear-off credit campaign. Everyone was ecstatic ...while the bubble was still inflating. CountryWide, FNMA, the folks getting the tear-off credit, and every POTUS who could announce the latest record % of American home ownership. Who in all of that was supposed to say 'NO' -- while the bubble was inflating? Had anyone, and there were plenty of folks warning about the pending mess, they would have been painted as a redline meanie for trying to keep folks away from the party -- while the bubble was inflating.

It was a Perfect Storm, an alignment of interests all around, but what enabled this Perfect Storm was the impressed by FNMA OneSizeFitsAll national nature of the experiment--literally used to brush aside more stringent state banking regulations, to enable the tear-off credit economies nationwide.

50 experiments running in parallel would never have magically aligned nationwide to give us this mess, and would have continuously learned from each others successes and failures. The failure of one of them would have never made it page 8 of the local paper, and the strength of the other 49 would have easily ameliorated the local mess.

It's united we stand, divided we fall. Not, united it stands, divided it falls.

A single point of failure national experiment was precisely what leveraged this current mess into its present size, and the folks trying to cling to and maintain the presently growing concentrated national power center in DC are desperate to paint this otherwise, to cling to their gig.

Meanwhile, the nation is buying it, and is largely asking for yet more concentrated centralized power.

As in worse faster, please.

regards,
Fred

Post 10

Saturday, December 20, 2008 - 8:03am

Things I will probably never see in my lifetime:

1] Devolution of federalism back to its role as traffic cop, not CEO of a set of economies coerced into being something they are not, to wit, 'An Economy.'

2] Re-establisment of 50 smaller state experiments run in parallel under those broad federal laws regulating commerce, learning from each other's failures and successes.

It's united we stand, divided we fall. Not, united it stands, divided it falls.

Look at the Sears Tower, in Chicago. It is strong, precisely because it is not one tower; it is a bundle of towers, holding each other up, propelling all of them together to heights not possible by any one of them.

Precisely because they are not in fact One Thing, but several things, together.

Look at a suspension bridge. Do engineers use single point of failure single strand cables, or multistrand cables?

Do we use chains, limited by their weakest link?

Then, why don't we go back to building economies, instead of toying with the constructivist idea of building 'The Economy?'

Are we really this collectively stupid?

regards,
Fred

Post 11

Sunday, December 21, 2008 - 6:56pm

Just my little two cents here. A lot is being said about how unscrupulous the institutions involve were with repackaging bad debt and whatnot. I'm sure a lot of unethical activity was involved, but it seems like this is the kind of thing you can expect when the gov't tells businessmen "Ignore your own rules. Up is down and down is up." With the strong implication that when the whole thing blows up they will be protected. I can't believe no one involved had the balls to stand in front of congress and say "You son of bi**ches told us to ignore our safe procedures and that you would protect us from the obvious results. How dare you now act like you weren't part of the problem." How is it even possible that no one has called Barney Frank to the mat for this?

Post 12

Sunday, December 21, 2008 - 8:29pm

Fred,

You're preaching to the choir with your post addressed to me. I consider those GSE's as bombs waiting to go off.... oh, wait, they did.
-------------

Ryan,

I agree. I can't say anything about Barney Frank without my blood boiling. And the further down this road of government intervention we go, the fewer people there are who are willing to stand up and call those slimy bastards the crooks and idiots that they are.

Post 13

Monday, December 22, 2008 - 8:30am

"How is it even possible that no one has called Barney Frank to the mat for this?"

That would require a party of power in opposition to what is going on at the CronyFest on the Potomac.

IOW, an oxymoron.

Both wings of The National Party circled the wagons. The crisis was, the future of their collective gig as "The Economy" runners.

I'd normally have hope that all the apparent government 'rope pushing' would accelerate the devolution of the current tribal mess, but the mess has all the guns, the mess owns the printing presses, and the mess will bring the nation far below even its knees before it willingly devolves its power.

The magnitude of its current blind flailings is an indication of our collective tolerance/insistence that it 'do something, anything.'

There is only one sane thing to do in this CF mess, and that is 'duck.' Flee, get out of its way, bunker down.

A staged tubing of our economies to paint the Bush Admin as Hoover, followed by a staged recovery for the incoming Obama Admin to paint him as the next candidate for Mt. Rushmore and another 40 year reign by the Democrats, requires a faith in stagecraft that I just don't have. No doubt, there are some? many? fools thinking they are going to ride the current mess and paint it that way to their short term political advantage, but in the end, crap don't float, and soon enough, even as we speak, the impotency of the new rope pushers to woo back the risk taking beast builders (while demonizing them) and reign in the scoreboard staring carcass carvers is going to be apparent to the freshly hopeless. And when the avoid the 40 years in the desert upside was at best a 'me, too' GOP as pretend Democrats, that was no upside at all. Dumb or dumber was no choice at all.

So...it is coming down, but it won't come down easy, and the roll the dice flip side is far more likely to be the next MadMax/Dark Ages as it is any age of enlightenment. The resources and survival skills in the farside of that potential world have a decent chance of being centered around things like shotguns, bags of rice, and penicillin. The futures on that possible fringe outcome keep going up the harder the current fascists cling to their current running out-of-gas gig.

OTOH, this is how a global loss of gradient should feel. Pockets of yet gradient in which the local weather is fine, surrounded by gulfs of greyness. As they flail from failed carcass to failed carcass, unable to live on bones, the fascists are going to focus more acutely on any remaining pockets of signs of living beast/gradient. There will be an acceleration of this current tribal madness, the longer it runs unchecked.

Our economies are either strong enough to tolerate these blind flailings and parasitism and carcass carving, or they are not. For a resolution to this drain circling, Barney Frank et al either have to ultimately be right about crony fascism(as in, it builds strong economies, it doesn't just parasitically devour them) or it has to become widely apparent to the nation that this crap just doesn't float.

That's pretty slim odds for a collectively arrived at happy ending, so ... 'duck.'

regards,
Fred

Post 14

Monday, December 22, 2008 - 8:40am

Here are two that did (plus your own source, if it isn't one of these):

http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/09/28/franks_fingerprints_are_all_over_the_financial_fiasco/

http://online.wsj.com/article/SB122091796187012529.html?mod=googlenews_wsj

Post 15

Monday, December 22, 2008 - 4:41pm

Louis,

Maybe given my profession, I look at regulation differently. To me regulation is just law promulgated by an agency. I don't have a problem with law, so I don't have a problem with regulation, per se. But I do want laws, hence regulation, to be sensible and just, and I think we could have used a few laws -- which could have been in the form of regulation -- to have avoided some of our current financial meltdown. Laws could have curbed a number of potential frauds, including: (1) bond rating companies who used mathematical alchemy to give their highest (least risky) ratings to bonds backed by risky subprime loans, (2) subprime lenders who duped borrowers into thinking their loans were workable, and (3) lenders in general who dodged their creditors and failed their investors by severely undercapitalizing and overleveraging.

Jordan

Post 16

Monday, December 22, 2008 - 8:40pm

For a "real government" that works extraordinarilly well, take a look at the $30billion+ Mondragon Cooperative. Although they don't yet, so far as I know, have very much in the way of a built-in judiciary, except for workplace issues, otherwise they fulfil most of the functions of a state, but on the basis of a fully worker owned, one-worker/one-vote, industrial democracy. No 20th Century Motors, they are dedicated to profit and to the long-term.

Imagine a world organized around the concept that everyone is a shareholder - not that everyone has the same wealth by any means, but that everyone is invested in the general success of the species. Instead of being organized on the basis of "need," the fundamental guiding principle would be profit, because policies that produced profit would increase the value of everyone's basic voting share, and what general rules and local regulations existed would either be private contracts, or Common Law derived.

Post 17

Friday, December 26, 2008 - 6:07pm