Submitted by Boanerges on Fri, 02/06/2009 - 10:54am
A lot of buzz is afoot blaming the current economic woes on deregulation or laissez faire policies. I have bolded the programs that came out of the New deal and give definitive evidence that shows our economy is neither laissez faire nor a free market.
The first concept is fiat money. This allows the government (and only the government in our system) to set the standard of currency and the amount of currency in circulation. That allows the government to set the interest rates that the banks use on their whims.
The next up is the FDIC. While it seems like a great idea, it has lingering consequences that will be explained later. I mention it here because it is an intervention in the market that eliminated our economy as laissez faire.
Next is Fannie Mae. If no other example existed this is a big one to disprove a free market. It is a government program with the specific intent to circumvent free market ideals. This program will back people to get loans that the free market would not otherwise support.
Let's start after the .com boom crashed.
Keep in mind that today's politicians are more interested in the appearance of things to get elected rather than the reality that faces them.
The feds start lowering the interest rates (using fiat money)to "prevent a recession". Now laissez faire supporters understand that the economy works in cycles and the recession should have been allowed to run it's course unfetered to allow the bad businesses to be eliminated. The feds in an effort to keep the economy from going sour "on their watch" started using the fiat money system to lower interest rates. They do this by giving the banks more money to use.
Enter Fractional-reserve banking notice it's not bolded. It's a naturally occurring economic concept. You may not have realized it but banks don't keep the money on hand to cover all their deposits. When you hear that a "run" has been made on a bank that means lots of people came at one time and asked for their money. The natural occurrence of this means a bank has to weigh the benefits of lending out more money with the ability to remain solvent. The more times they lend the money out the easier it is to become insolvent. Historically banks would even engineer runs against each other to put banks out of business. Enter the FDIC. Since the government guarantees part of our money (using our money BTW ...huh?) they now have a vested interest in preventing a run on banks and will take steps necessary to prevent it. This means that banks can loan out more than they would be inclined to naturally because the know they have the protection of the government.
Now lets put all this together and relate it to today.
Government lowers interest rates, this gives the banks more money to lend. They want to lend more money because at the lower rates they need to lend more dollars (volume) to make money.
Housing, a historic "always gainer" seems a good investment.
Politicians like housing because helping people get a house looks good on your resume. So fannie mae eases the requirements to buy loans from banks. As if this weren't enough they also pass laws that state banks should lend to unworthy persons. Don't worry, we'll buy the loans.
So with more people able to buy houses,(an increase in demand) house prices soar, making them better investments and a bubble is created because the cycle continues.
Now government starts to fear inflation. That is what happens when too much fiat money is on the market. Inflation is bad for business for politicians because it takes money out of the people's pockets. So they use the fiat money to raise interest rates. (take money out of the market) Now many people that took out adjustable rate loans and are maxed out on their credit, (and gas prices soared at the same time) can't afford their house, and the tower starts to crumble.
Now to fix the problem the feds have lowered interest rates to the point they can't lower them anymore and are going to attempt to put 1 trillion MORE dollars on the market. It's a recipe for disaster. Unfortunately since almost all the people in the United States attend public school, and have been indoctrinated by our government to believe that FDR and his big government programs were the savior of the country we are destined to follow this path, I am afraid.
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Re: How the Great Depression contributed to the current ...
Hi Boanerges!
I have enjoyed your perspective on various topics, you are a prolific writer and a demonstrated free-thinker.
I don't want the lack of enforcement of regulations or the outright deregulation of banking to slip through unnoticed. A clear summation of the series of events that can occur (and arguably did these past three decades) when financial institutions begin to securitize loans, speculate, and leverage the securities can be found here:
http://www.prospect.org/cs/articles?article=seven_deadly_sins_of_deregulation_and_three_necessary_reforms
We all know what happens when Wall Street smells blood in the water. In an unregulated financial system, when Fannie starts to lose market share to firms offering similar services- packaging mortgages and converting them to bonds, Fannie tries to compete. Fannie was born in an atmosphere of regulation and risk back then was almost non-existent in the mortgage arena for lenders. What was set up as a stable SUPPORT SYSTEM for lenders became the market's bitch. I currently feel strongly about regulation because I believe that (Idealistically) government is US, you and I, and I don't see anything wrong with controlling the way private financial institutions play a game that REQUIRES governmental infrastructure to exist. And if I'm misguided about that, I feel that we should have a say in these matters through our elected officials. Yes, merely scratching the surface, certainly (as I said) idealistic, but I'm just starting to get my head straight after being thrown so many punches, I'm still on the ropes.
Re: How the Great Depression contributed to the current ...
Thank you for the compliment and welcome to RtH!
Now, the article. It's obviously partisan, written by a liberal. As things go that usually means they hate the free market and will do their level best to trash it. That however doesn't make the information inherently wrong so let's examine some of the things included.
This is saying that the private sector emulated what the government was doing to start with. And why is Fannie Mae losing market share a problem. It was originally a program to get people into houses after the depression. If it's losing market share that is actually good. It's the market taking over. Fannie/Freddie should have been shutdown a long time ago.
Sin Three: Failing to Police Sub-prime. Failure to Police? How about actively encouraging Sub Prime lending. Community Reinvestment Act, it's only purpose is to place people that otherwise would not get loans in houses. While he mentions conflict of interest in a later "sin", he doesn't mention the conflict of interest that the government faces. Passing laws to put people in houses but also passing laws to keep people out of houses due to financing/credit issues.
Sin Four: Failure to Stop Excess Leverage. The SEC actively encouraged it. The article I linked to I have always found comical. She is attempting to make a case against deregulation but she makes the case that regulation failed. They didn't cancel any law or change a law the just changed the rate. If the speed limit is raised from 55 to 65, we are less regulated, we are just regulated differently. This also brings another point of government interference to light. With the government, you never know who will be in charge of a particular program in 4 years (Think Brownie). So while Gietner may be the sharpest economist ever, who will be in charge in 4 years?
Sin Seven: Repeal of the Glass-Steagall Act. While this has been use to place blame by many, most overlook the obvious. The repeal of this act has help us through this crisis immensely were this still a law companies like JPMorgan Chase and Citibank or BoA and Merrill could not have merged which would have left either the companies to fail or government to take the full brunt of the collapse. (and on the point I posted to start with about the partisan nature of the article, the writer fails to mention that Clinton signed Gramm-Leach-Bliley into existence)
It all boils down to the fact that GOVCO works on the law of unintended consequences. Every law they make has the "Butterfly Effect". Then when the effect is undesireable, they make more laws. I honestly believe at this point in time, so many laws are on the books that politicians can't ever predict what the outcome will be of passing another law.
Re: How the Great Depression contributed to the current ...
Hello again,
Thanks for the welcome, it's nice to have a forum for discourse and hammer out ideas.
To further our discussion, I will grant you that this article I linked is biased and your reluctance to dismiss it out-of-hand speaks to your fairness.
Initially, I would say that Fannie and Freddie have served a market purpose as a service to banks to keep them in cash for lending and out of securities, where insured loans do not belong. I meant to assert that Fannie should never have been in the position to compete with anyone, because no other institution theoretically should have been allowed to securitize loans. A failure of government regulation? or enforcement?
You said: (sorry, haven't learned to quote yet)
I absolutely agree. As I said, this article presents to me a road-map of HOW these things can and have happened, although it takes the step of assigning blame. The point here for me is that the administration and even, in cases, the congress have found uses [foreseen (leading to initial regulation to quell bad behavior) or unforeseen (leading to widespread opportunism)], for programs like Fannie and Freddie that blur the line between the private sector and the public which makes the public financially responsible for private abuses. I say abuses and what I mean is 'normal' market activities with the foreknowledge of zero risk. Though supposedly governmental in nature, I assert these measures taken have not been in the interest of 'we the people'.
Again, the sin lies in the intentional lack of enforcement of regulation and disregard for original intent. Of course, you're right about the veritable revolving door of appointees that occupy these posts, but look who gets appointed: market opportunists from the private sector. Loyalty of these humans is firmly rooted in the shark pool, not with keeping things boring and safe.
This is a hot point of contention. The obvious thing to me is that banks and/or brokers allowed unfettered growth (read: cancerous) by the 'free' market become too big to fail - thus the bailouts. Natural selection does not belong in finance, because the system isn't natural, it's contrived. The economy is a construct created by humans to serve humans. The banks merging with brokers creates unholy creatures that never should exist. It's still comes back to private activity with public risk. That is why regulation, that is why anti-trust. By the way, I don't see regulation as a permanent solution, but as your signature suggests - temporary government programs are an exercise in permanence. When a sound system is in place to immunize the public from risk, and the public interest is once again required for corporate charter, I say let them have at it and make as much as they can while assuming full risk. Don't get me started on Clinton.
Here's how I see it: it's what we in the world of health call chasing symptoms. It's what most humans do when a symptom arises: focus on eliminating the symptom rather than understand the critical biofeedback that symptoms simply are, then address the illness and truly heal. Symptoms pile up, consequently so do diagnoses and prognoses (which carry their own slew of new symptoms). But let's not forget that many laws that have national ramifications aren't even penned by lawmakers, they are products of k street and short-term gains are the focus of special interests more often than not. Again, it's the people who assume the risk and receive little gain. This speaks nothing of 'social legislation' (as if all legislation isn't socialism), I know, but my assertion about symptom-chasing applies here.
It's supposed to be all about us, Boanerges. 'We the people' IS government and this is our country and what we say goes. This is an experiment, always has been, and I think the founders wearing their idealist caps intended it to be that way. So why allow behavior by any domestic entity that isn't in our populist interests? Especially corporate behavior and equally, bureaucratic behavior.
What say you, my friend?
Re: How the Great Depression contributed to the current ...
Securitizing assets in not a bad thing per se. The problem that existed here is as most of the housing became sold, a lower (credit) class of people had to be recruited to by housing. Add in soaring home prices and a lower (credit) class of people had to be approved to buy a high priced home.
To the bolded part, I agree. These are programs instituted by the government. What you are stating serves to reinforce my standing that government instituting these programs is ripe for abuse. More reason to shut them down. Is there any question that Mel Watts or Barney Franks use these programs to increase their popularity?
All are things that couldn't be abused if the programs didn't exist to start with.
This very blog post is about the fact that the market is not a free market. That was the intent. Our economy is grossly manipulated by politicians that have their best interest in mind, not ours. Even if some did or do supposedly have our best interest in mind their manipulation of the economics caused consequences they did not foresee.
) Now we are far from that but Natural markets have checks and balances. For example when the government isn't doling out the money, in order to make loans a bank would have to raise their interest rates on saving accounts to encourage more money to be placed in the bank. They would also have to be reasonable about how much they lent out because other banks could orchestrate a run on them and make them insolvent. Since we have government intervention all that goes out the window. GOVCO guarantees them money in the banks so they protect them via laws from other bank runs. This in turn leads to GOVCO setting the rate at with they can operate their fractional reserve. GOVCO fails at that as we have seen.
Economics and markets are a natural occurring thing. Our economics and markets are not natural. They are contrived. Again that is the point of the blog post. Put three people on an island and eventually Person#1 (John) will figure out that he is really good at hunting but sucks at building. Person#2 (Bill) will figure out that he is a great builder but can't hunt very well. As John and Bill figure out that their time is better spent hunting and building respectively and then trading with the other person a natural market is formed. (BTW the third person is Jane. She figured out she's the only female and can trade that for...well ANYTHING!.......oh, I digress J/K
AH...See, here is the way I see it. The natural market has certain checks and balances. The reason corporate behavior is so out of hand is because we have removed those checks and balances. Bureaucrats then try to replace them with their own but fail miserably. Unless those C&B are restored we are going to be continually fighting this battle. Politicians will inevitable act in their own interest or at the very least in the interest of pushing their own agenda. I equate the economic cycle closely to your description of the global cycles in the other thread.