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“Le laisser-faire, c’est fini”?

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13 Responses

  1. Fannie Mae and Freddie Mac were government entities in all ways except their technical designation as private companies. They had special federal borrowing rights, a special regulator controlled by congress, and the implicit backing of the federal government.

    Fannie was a government agency until Pres. Lyndon Johnson made it off balance sheet and half-private in 1968, to reduce the apparent government deficit at the time of the Vietnam War. The implicit government guarantee gave them the power to borrow whatever funds they wanted, to buy mortgages and issue mortgage backed bonds. This was $5.4 trillion at one point in the last two years, including $1.4 trillion in sub-prime mortgages.

    The federally approved ratings agencies S&P, Moody’s, and Fitch owed their profitability to political favor, and they came under pressure to give AAA ratings to the new mortgage backed bonds and the highly technical (and now understood as risky) CDO’s (collateralized debt obligations). This allowed the bonds to be sold to financial institutions around the world. This put a stamp of approval on bonds by Fannie, Freddie, and huge volumes from private issuers.

    Government oversight committees did not mistakenly overlook these developments; this was all government policy.

    If these businesses had been designated as official agencies of the government, then the financial crisis would be correctly seen as a failure of a massive, off-budget, government program. However, because they were unofficial government agencies (the creatures of government policy, power, and influence), the cry is that the free market has failed. So, in the greatest irony, government argues for greater regulation and management of business and the people’s lives.

    “We Guarantee It”

    A collection of references to information about the causes of the mortgage and financial crisis. How the government directed massive resources by implicitly guaranteeing the actions of Fannie Mae and Freddie Mac.

  2. A.J. Sutter says:

    I read Altman’s piece a bit differently. He seems to be in denial about the role that Anglo-Saxon economic thought may have played in creating this crisis. He shows no interest in questioning the intellectual premises of the past decade or more.

    To put the “intellectual strength” quote in context, he says “[F]or decades much of the United States’ influence and soft power reflected the intellectual strength of the Anglo-Saxon brand of market-based capitalism. But now, the model that helped push back socialism and promoted deregulation over regulation … is under a cloud. The U.S. financial system is seen as having failed,” (emphasis added). He does not say that this intellectual model has been weakened. He goes on to chide Sarkozy and Berlusconi for “making fiery speeches about protecting their domestic companies from being acquired by foreign interests — hardly a message consistent with modern economics.”

    Similarly, he locates the “underlying cause” of the crisis in “the (invariably lethal) combination of very low interest rates and unprecedented levels of liquidity.” He blames the Fed for the interest rates, but “The liquidity reflected, among other factors, what Federal Reserve Chair Ben Bernanke has called ‘the global savings glut’,” particularly in Asia. Again, apart from his dissing of the Fed, he is offshoring the blame: Asian savers now join the ranks of the culpable along with those who “see” the US financial system “as” failed. As if Americans’ tendency of not saving couldn’t be part of the problem.

    Living in one of those Asian countries, I can report that folks here are not interested in neoliberals blaming them for saving too much, and calling on them to spend more. The approval ratings of the current Japanese cabinet are in a spectacular tailspin for ramming through a stimulus package in line with this aspect of “modern economics”. Moreover, if you actually read the writings of French economists, you will discover that there is a much broader range of thinking about economics (including the Anglo-Saxon view, but many other viewpoints besides) than in the States. Though it may be effective “fiery” rhetoric to present “socialism” in the undefined, monolithic way that Altman does, Americans deserve a more thoughtful analysis of what is being pushed back and whether it ought to be.

  3. A.W. says:

    Declarations of the imminent demise of capitalism come by about as regularly as the latest “Farewell Tour” for the Rolling Stones and is generally about as credible.

    So… the government regulations lead to a complete economic catastrophe and that leads us to think we need… more government regulation. Can’t argue with that.

    And of course let’s not talk about Mark Steyn’s point about the looming disaster coming to europe.

  4. E.L. says:

    “One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary.”

    -Ayn Rand

  5. A.W. says:

    E.L. Awesome quote. fits this mortgage mess to a T.

  6. Yeah, awesome, all those controls on the mortgage industry created this mortgage mess we’re in.

    Right on.

    Let’s have more chapter and verse from one of the most brilliant philosophers and best writers of the twentieth century.

    Awesome.

  7. A.J. Sutter says:

    I admit it’s kind of arbitrary to select this particular post as an occasion to remark on some readers’ frequent chorus of comments on this blog railing against government intervention, but the mention of laisser-faire in the post’s title may be a sufficient excuse.

    The commenters’ critique is conveniently based on a counterfactual, in that there has never been a period in US history (at least, since before the 1929 crash, or even earlier, since before antitrust regulation, or even earlier, prior to the abolition of slavery) without some form of government regulation of the economy. So there’s always some government “intervention” that can be pointed to; this seems to absolve everyone from documenting an affirmative case, in which society was much better off without government regulation of any kind. This gives a de facto circularity to their argument. If someone cares to come forward with an historical example, and explanation of why that was superior, it would be helpful — provided, of course, that the example involves an economy in which none of the actors took advantage of the particular form of government regulation known as corporation laws, nor of any other form of legislated limited liability.

  8. Mike says:

    True, mortgage problems are not the root cause of this crisis. But low interest rates and too much liquidity aren’t either. What the problem is is that the US “middle class” is such in name but not in income.

    Though male earnings have been stagnant since the 1970s, family income could try to keep up a middle class lifestyle with the entry of women to the workforce. But womens’ income has been stagnant as well. As family income started to fall behind a middle class lifestyle, families did use the increasing housing “values” to take money out of their home through the mortgage mechanism. Then the housing bubble burst, so those techniques will not longer work.

    Rather than the common complaint that union wages in the auto industry are the problem, the problem is that all too few people have jobs that produce middle class family incomes.

  9. A.W. says:

    Shorter Patrick: “Booooo!!! Hissss!!! I can’t say anything substantive, so… Boo!!! Hisssss!!!”

    Grow up.

  10. A.W. says:

    A.J.

    The fact is that the government, from the 70′s, has pushed banks to make subprime loans. When many of those loans when bad (surprise, surprise), then, the government can’t escape blame.

    The fact that regulation continually leads to market distortions and even market failure, suggests to me that as a general rule of thumb, less regulation is better. Which is not to say anything should go, but I think we intrude far too deeply into the market already.

  11. “E.L. Awesome quote. fits this mortgage mess to a T.”

    Thanks for setting the bar so high, but I can’t reach it until I grow up.

  12. A.W. says:

    Patrick

    Wow, you have fully descended into being a comment troll, stripped of any pretense of content and continually mendacious.

    In this example you ignore the fact that unlike you I had already made a substantive comment. You also ignore the difference between criticism and praise. When you agree with someone you don’t have to say why. but if you disagree, then you need to back it up. Otherwise you are just a troll.

    Pathetic.

  13. What A.J. said (here and before). And what Frank Pasquale has said elsewhere. But regular readers no doubt know I how feel about such matters so there’s no need to repeat myself.

    Now that I’m a troll, I suppose I can’t grow up.

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