But this is not the final grade on deregulation that so many people seem to think it is. "Deregulation" is not one thing, and as I mentioned before, it's not even a "there are no rules" condition. It's a philosophy. Like the failure of the Soviet Union is not a condemnation of Karl Marx, AIG's failure in 2008 is not a condemnation of Alan Greenspan's 1960s essays on bad regulatory policies.That's a noble anology. Many people think the failure of the USSR is a condemnation of Karl Marx. Obviously you can have too much or too little regulation. Why doesn't this crisis suggest that we have been too quick to deregulate everything?
Wednesday, October 8, 2008
Good Stuff
Matt wrote something in the debate grading post that raises something interesting. What constitutes definitive, or even strong, evidence that a particular economic idea is a failure? Here is what Matt wrote about our current financial crisis:
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9 comments:
I think this crisis very well might be an indication that we deregulated too much too soon--to evoke a Jenny McCarthyism. But that doesn't mean it's a problem with deregulation in principle.
Whenever you regulate transactions as a central planning authority, you presume that you know, that you can know, the better (or best) way for that transaction to transpire. That is almost always not the case.
Now we have congresspeople who are trying to decide how much the work of a financial institution's CEO is worth, per year. It's hard to even start a list of the fallacies underlying that hubris. Let's just start with how inappropriate a question that even is for a democratic capitalist. Next let's recognizes that this presumes that the congress, as a body, has more information in setting a price for CEO-ness than the board of directors of that company--this is clearly not true. Next, let's unpack who exactly knows the magic formula which lays out what proportion of a company's worth, revenue, costs, efficiencies, profit, pricing, strategies, et. al., that a particular CEO is responsible for.
I guess I could go on, but there is no point.
I responded to this in a previos thread, so I'll just cut and paste:
But this is not the final grade on deregulation that so many people seem to think it is.
Completely agree. there's a pendulum, and it's swung pretty hard towards less regulation over the last 20 years, and it's just now starting to swing back towards the center. I hope it doesn't swing *all* the way back to strangling over-regulation; I doubt it will.
On the CEO topic: Matt, you have been pretty hung up on this point, and I think you are missing it. It's not that anybody thinks that the government has any business regulating executive comp in general. This is entirely punitive. It's saying: you guys ran your business in the ground and we're pissed that we have to spend public funds to bail you out. Your shareholders are paying the price for your recklessness, and we are going to make sure you also pay the price.
It's arguable whether spite is good public policy (some would say yes, in that it extends the moral hazard to the execs), but you need to understand that this is driven by a desire to take a pound of flesh from the execs, not because Congress thinks executive pay needs to be regulated across the board.
This is entirely punitive.
Well...okay. I guess. That's bizarre then, and kind of criminal I think. I really am not qualified to call it unconstitutional, but isn't it really, really not the business of Congress to fine an executive for being bad at his job?
[It's] not because Congress thinks executive pay needs to be regulated across the
Okay, but doesn't that just make it worse? Much, much worse? If they thought it was their purview to set private salaries, that would be wrong and bad, but at least it would be *legal*, in the sense that they could pass a law that says, "Congress shall set private compensation structures."
But just levying fines for being not good at their jobs is... well... criminal, right?
As I said, I don't know if spite makes good public policy. No, not at all criminal, but clearly vindictive and petty.
It actually doesn't bother me. It feels like a small and petty justice.
That's bizarre then, and kind of criminal I think.
I don't understand. Aren't they entering into an agreement, "We'll buy up your worthless assets and try and help save your company, here are the conditions." I don't see where that is criminal, let alone unconstitutional. Where am I wrong about that?
I'm not saying it is or isn't a good idea, mind you, but that's very different argument than its illegal.
To the original question: What system? I think this crisis was pushed from two different directions.
One, yes, was loosening of regulation that allowed some very risky things to be done that couldn't have been done before. But, what started the dominoes tumbling was the failure of mortgages, and the Government has been promoting mortgage loans and home ownership because it seemed like a GOOD THING to do, both morally and as a vector of economic strength.
So I don't think you can say the crisis is a failure of laissez-fare policies. It's not that simple. It's a cocktail of loosening regulation and Government intervention.
Okay, I've flipped around the internets a little, and the encouragement I can see from the federal government that lead to the crisis was allowing banks to lend without as many restrictions, allowing banks to lend at lower interest rates, etc.
So, Josh, aren't both the things you mentioned deregulation?
Jim, read this article from 1999 praising the Clinton administration's drive to increase home ownership for low income families, particularly minorities.
Minorities’ Home Ownership Booms Under Clinton
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