What Would Mises Do?

Confessions of a free-market, anti-bailout operator

Over the past several days, I have found myself in the most unusual of positions: defending myself and the organization I work for, FreedomWorks, for to having clung to “ideology” and “principle" in opposing the bailout plan racing through Congress. I had never heard the word principle used so much as a pejorative. You know the tone in someone’s voice when they clearly understand the world and are trying to explain it to someone, well, simple. What was even more interesting was who was doing the scolding. Friends and fellow travelers in the free-market movement, businessmen, Republicans, and limited-government conservatives all took time to tell me how wrong I was.

Their argument: “Something has to be done.” One old friend went so far as to blame FreedomWorks for the 750 point loss in the stock market Tuesday, the “freezing” of capital availability to small businessmen, and all of the economic misery to come, all because we have loudly objected to Treasury Secretary Paulson’s $700 billion-plus bailout for failing investment banks on Wall Street.  The “You don’t care” argument sounded disappointingly reminiscent of accusations from the left many of us have endured as we were trying to free poor people from a downward cycle of government dependency by replacing welfare with work.

I joked to another Beltway friend who was actually against the bailout that you could now fit the remaining community of free market capitalists in Washington, D.C. in the back of my car.

So my question to my critics is simply this: What good are principles if you are willing to throw them out the window every time they prove inconvenient?  As a trained economist, I have often relied heavily on principle when the data is confusing and conflicted.  Finally, temptation got the best of me, I pulled down some dusty books from the Austrian economists Ludwig von Mises and Nobel Laureate Friedrich Hayek.

I know, I know.  Dead economists!  Ideology!  

“My name is Matt, and I’m an Austrian economist.”

Dirty laundry aside, it strikes me that our current financial crisis has all the characteristics of a classic government boom-and-bust cycle generated by easy money and credit as described by Mises in The Theory of Money and Credit, Human Action, and Interventionism.  Easy money from the Federal Reserve, coupled with easy credit provided indirectly via the Community Reinvestment Act and directly via government-sponsored-enterprises Fannie Mae and Freddie Mac created an unsustainable housing bubble. By corrupting the standard of value and bullying financial institutions into giving loans to the unqualified, these government actions distorted relative prices and caused generalized errors in economic calculations and investment decisions. “True,” says Mises, “governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late.” The inevitable correction will be painful, but attempts by government to inject new money into the economy to repair the real economic pain caused by the boom-bust cycle leads to more sustained pain, inflation, and economic stagnation.

As for Paulson’s desired role to become economic czar and CEO of the American economy, I recommend Hayek’s famous essay, "The Use of Knowledge in Society." Hayek says it best. “If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic...This, however, is emphatically not the economic problem which society faces...The reason for this is that the 'data' from which the economic calculus starts are never for the whole society 'given' to a single mind which could work out the implications and can never be so given.” This is the same argument both Mises and Hayek used to dismantle the idea that socialist systems could supplant price discovery through the market process with really well-meaning, smart bureaucrats. By now, virtually everyone realizes that a full-on socialist economy brings only human misery to people, particularly to workers who don’t have access to the special favor of the political elite.

Or is that really understood?  Listening to Wall Street types and their friends (from both political parties) in office, you would think that free market capitalism is fundamentally broken. Many are downright hysterical in their predictions of gloom and doom. I had read about the phenomenon, but now I actually understand what a “panic on Wall Street” really is. But it is very difficult, in the current legislative panic, to discern fact from fiction. One popular example is the assertion that capital for small businesses is “seizing up.”  People I trust have told me this. 

Many more people with a vested interest have asserted this. The most popular example widely used in the past few days is the claim that Sonic Drive-Ins were being denied, despite credit worthiness, needed business capital by GE Capital. Even the McCain campaign uses this talking point. It is, inconveniently, an urban myth, just like the guy that had both kidneys stolen and wakes up in an icy bathtub.  According to a press statement by the company released on Monday, “GE is just one of many lenders who finance Sonic franchisees and, in fact, many franchisees maintain access to other diversified sources of financing. Furthermore, Sonic has not received any notification from GE Capital, either directly or indirectly, that it will stop financing new loans to Sonic franchisees.”

This is not to say that the economy is not in serious trouble, that capital flows are not being disrupted, or that access to credit is not a problem. The point is that the government is proposing to redistribute $700 billion dollars. That’s more than the annual GDP of Australia. With that much money on the table, expect disinformation to permeate the public debate. Some of that misinformation is intentional, but most is not. As a good Hayekian, I understand that knowledge is dispersed throughout the economy, and that good information only emerges if the discovery process is allowed to function. To put it another way, the only thing I know certainly is that I don’t know everything.

This is not an ivory-tower, think-tank point. It seems to me, during times of economic crisis, that there is an obligation to first do no harm. Should we rush to pass legislation written by tired, 25-year-old legislative staffers in the middle of the night in offices littered with Domino’s boxes and empty vente Starbucks cups? What are the inevitable unintended consequences? My biggest fear is that the plan will do far more harm than good, even in the short run, by propping up poorly performing banks at the expense of well-run institutions ready and able to come in and clean up the mess. And, yes, as Warren Buffet could tell you, they hope to make a healthy profit doing it.  

We are talking about legislation that will fundamentally alter the face of American capitalism for at least a generation.  Allowing investment banks to go to the government for a $700 billion line of credit is akin to inviting a vampire into the house. If you live, you certainly won’t be the same person when you wake up the next morning.  

Assuming that all of the short-term problems are real, and assuming that we are headed into real economic hardship, what should we do? What would Mises do?  A quote from Hayek’s Fatal Conceit is instructive: "The curious task of economics is to demonstrate to men how little they know about what they imagine they can design." (Hat Tip to economist Peter Boettke). Paulson’s audacious power grab has tainted the whole debate, crowding out a more rational conversation about how to remove real barriers to better-functioning markets.  Especially after last night's dispiriting Senate vote, and the coming second round in the House of Represenatives, that conversation is less likely to happen than ever.

By the way, the next Austrian economists (AE) meeting will be held tonight, in my car. Bring your sponsor. If you don’t have one yet, one will be assigned.  I don’t want anyone else to slip off the wagon.

Matt Kibbe is president of FreedomWorks Foundation, a grassroots education organization that believes in lower taxes, less government, and more freedom

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  • phalkor||

    I feel scared.

    What's a poor boy to do?

  • ||

    I think every congressperson who votes for the bailout ought to personally contribute the entirity of his or her stock portfolio to the 700 billion. It's not a sacrifice. After all, they will surely profit.

    Something must be done!

  • ||

    Nothing like a little Hayekian quotation to calm a worried mind.

    *Aaaahhhhh....*

  • ||

    What was even more interesting was who was doing the scolding. Friends and fellow travelers in the free-market movement, businessmen, Republicans, and limited-government conservatives all took time to tell me how wrong I was.

    What are you? Retarded? Where the fuck did you get the idea that businessmen, or Republicans were "friends and fellow travelers" in the free-market movement (BTW when did we become a movement? How do I get on the mailing list?). And how many 'limited-government conservatives' do you know? I think you can fit all of them on a bus.

    So now you're "Shocked shocked" to hear em squealing as they try to muscle in at the government trough. Good fucking morning sleepyhead.

  • ||

    Warren is killing my buzz...

  • phalkor||

    Why are there no free market and limited government conservatives?


    Is the teat just too sweet?

  • ||

    Why are there no free market and limited government conservatives?

    There probably are, just not in the GOP.

  • ||

    I just saw that new bailout being proposed has some alternative energy pork included. The bailout is bad enough but does anybody here know what alternative energy has to do with any of this?

  • ||

    I'm depressed. I'm under 30, I'd like to buy a home in the near future, and a massive market adjustment is just what I need. It's sad, but I feel like I'm already turning into one of those crotchety "we're all doooomed" libertarians that hang out at lewrockwell.com.

  • ||

    "Easy money from the Federal Reserve, coupled with easy credit provided indirectly via the Community Reinvestment Act and directly via government-sponsored-enterprises Fannie Mae and Freddie Mac created an unsustainable housing bubble. By corrupting the standard of value and bullying financial institutions into giving loans to the unqualified, these government actions distorted relative prices and caused generalized errors in economic calculations and investment decisions. "True," says Mises, "governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late." The inevitable correction will be painful, but attempts by government to inject new money into the economy to repair the real economic pain caused by the boom-bust cycle leads to more sustained pain, inflation, and economic stagnation."


    That is exactly what happened. No bailout is going to change the fact that real estate is overvalued and is going to be revalued. The quicker we understand that the better off we will be.

  • ||

    There are free market and limited government conservatives. We have just been watching Bush, Kristol, Krauthammer, Brooks, et al. calling themselves "conservatives" that now we are just "nihlistic libertarians".

  • elares||

    With the US gov't taking over the economy, can anyone tell me what country is doing things right/significantly better. At this point I'm considering a move to avoid the generation long recovery from the 'bailout'.

  • Kyle||

    "It's sad, but I feel like I'm already turning into one of those crotchety "we're all doooomed" libertarians"

    Word. I've always turned my nose up at conspiracy theorists and the angry, angry "we're all doomed" crowd. But, I really do feel like Lenin's conscripts will be walking down Nevski Prospect (or Pennsylvania Ave) any moment.

  • ||

    I hope John McCain will start making pork-adders "famous" early. Those twats who added pork to this bill are taking such an easy, evil way out... just tag your pet project to a bill that the gov't is desperate to pass and is so massive that a $1 billion pork project would look like small potatoes.

    Is it possible to figure out who the pork-adders are?

  • ||

    Is it possible to figure out who the pork-adders are?

    Every single Yes vote.

  • ||

    Folks, we libertarians need to buy time. There aren't enough of us, nor have we been persuasive enough, for the public to turn to us if the economy crashes. Once the conseqences are evident, they will turn to more government - ala the New Deal or worse.
    This bailout will buy time - time for the public to go back to sleep or time for a real grassroots libertarian community to get its act together and put forth the reasons why all this happened and suggest practical ways, that the public will buy, to avert even more pain in the future. If we can't do that, or fail to do that, our grandchildren will live in a totalitarian state.

  • Paul||

    It's not a sacrifice. After all, they will surely profit.

    This is an excellent point. I've been calling everyone on this who says the gov't will make money on this. If it's such a safe, sure-thing investment, where can I sign up?

    Where are the Warren Buffets diving into these SIV's and MBS's?

    This notion of the government "investing" this $700b for us is ridiculous. It's a massive giveaway which aims to be the 'buyer of last resort', probably paying as much as $1.50 on every dollar of paper, instead of pennies on the dollar which is what the private sector would do (and has so offered).

    Oh, and the "Paul" above (who made a perfectly reasonable post) is not the Paul you all know [and love].

  • Paul||

    but does anybody here know what alternative energy has to do with any of this?

    Emergency bills are the cesspools of spending.

  • ||

    Joseph Stiglitz has some interesting ideas on our current situation. Would love to hear what the other Reasonoids think about it. Here's one idea that I think is on the border-line of being libertarian-friendly. Anyway, kick it around and I'll check in later.

    Over-reaction, we are told, might stifle "innovation." Well, some innovations ought to be stifled. Those toxic mortgages were certainly innovative. Other innovations were simply devices to circumvent regulations-regulations intended to prevent the kinds of problems from which our economy now suffers. Some of the innovations were designed to tart up the bottom line, moving liabilities off the balance sheet-charades designed to blur the information available to investors and regulators. They succeeded: the full extent of the exposure was not clear, and still isn't. But there is a reason we need reliable accounting. Without good information it is hard to make good economic decisions.

  • ||

    "Every single Yes vote."

    I think some of them really do believe that the bailout is just necessary and will vote yes on it even without their pet projects.

    I'm really curious... is it possible to put a name to a piece of pork? Maybe we could have a watershed of pork-pulverizing potential if someone (e.g., McCain as promised) make these dicks famous... especially if pork riders get blamed for this thing going down in the house.

  • Guy Montag||

    creech,

    My guy in the House voted against the bailout. Waiting to see what my Senators did today. Betting Alexander voted against my wishes and needs a visit to mend his ways.

  • Mike Laursen||

    Businesses that are doing well, like Sonic Drive-Ins, mentioned in the article, are going to get pissed that all these chicken littles keep going around saying they are having problems. Didn't Bank of America have to issue a statement the other day saying, "We're doing fine."

  • Paul||

    I'm depressed. I'm under 30, I'd like to buy a home in the near future, and a massive market adjustment is just what I need.

    You nailed it. This is a real opportunity for low income and *gasp* minorities to get into homes-- homes that they can now truly afford. But yet the government will rush in to prop up prices, holding inflated housing prices to their inflated levels, and thus, in a ridiculous and sublime outcome, continue to shut out the very people they tried to extend home ownership to by offering unaffordable loans to.

  • ||

    creech:

    I'm way ahead of you. I vote that we take over Catalina Island and declare it the Democratic Republic of America.

    My thinking is this: there are too many liberals on Long Island [source needed]. SoCal is laid back and dysfunctional enough to not expect or respond effectively to a breakaway republic popping up in their midst. The New Yorkers seem better organized.

    Anyway, Reasonoids, your thoughts on that one, too.

  • ||

    There is something I find odd about all of this. Mortgage loans are secured by real property. While the original lender (or subsequent buyer of the note) may be underwater for the foreseeable future, why isn't anyone in the private sector willing to buy up all of the paper on a discount basis, kind of like how companies buy up charged-off accounts?

    I think the answer has to be that the valuation of the bad notes is too much in question. However, unlike unsecured paper, the value of these notes is much more than zero.

    As for the general state of credit, my company just got a few hundred million in loans, and I don't see the huge credit squeeze in many other places, either. Even in real estate, the actual availability of credit is difficult to assess, because no one wants to buy much right now.

  • matt2||

    I'm with Taz - I'd like to buy a house but I'm young and they're very expensive. Every time I hear bullshit about "help for homeowners" it really pisses me off.

    We're basically saying that anyone in America should be able to own any house that they want.

    Unless they haven't bought it yet.

    Fuck that.

  • ||

    Incidentally, I love this entirely accurate quote from the article:

    Should we rush to pass legislation written by tired, 25-year-old legislative staffers in the middle of the night in offices littered with Domino's boxes and empty vente Starbucks cups?

    Considering that similarly inexperienced people heavily influence Supreme Court opinions, maybe there's a reason our country seems like it's being run by teenagers.

  • ||

    Oh, and another thing. The House Republicans voted by a 2:1 margin (65%:35%) AGAINST the first bail-out. The House Democrats voted FOR the bail-out by a 60%-40% margin.

    So, I'm not sure why everyone is screeching that there are NO pro-market Republicans (*cough cough* Jeff Flake).

  • Guy Montag||

    UGH!

    Lamar Alexander is crowing on his Senate web page that he voted FOR this stupid bill! So did freaking Corker!

    AAAAAAAAGGGGGGGGGGGHHHHHHHHHH!!!!

    And Tampa is leading the Sox 5 to 3!

    I am headed over to the bar for the game.

  • ||

    The large drink at Starbucks is called a Venti, not a vente.

  • ||

    6-3.

  • ||

    Adam,

    They can only afford knockoffs. Staffers don't make much, and they live in DC. Anyway, I'm merely quoting--take it up with the author.

  • Paul||

    Alberto:

    Well, some innovations ought to be stifled. Those toxic mortgages were certainly innovative.

    They are being stifled. The market is working-- we do not, despite what King Henry Paulson says-- have a market failure. We have a market success. Toxic products are being routed as their real value (or lack thereof) becomes exposed.

    And I'd like to add a little something about these 'toxic' (sub prime, interest only etc.) loans. All of these innovative products still have their place. They were designed for specific and specialized situations. What ocurred is they were overused and misused.

    Interest only mortgages, for instance, do have a place. Scenario:

    High earning yuppie couple has dual incomes. Lawyer wife takes a year off of her high-power career to have a baby. Couple sees large drop in income. Couple needs to move out of swanky, loft-condo because there's a baby on the way. There's this great craftsman with high ceilings and mahogany floors over in Madison Valley that they'd like so totally be able to afford, if Miss L.A. Law got back to her high-powered attorney job. So the couple takes an interest only loan whose principle comes due shortly after she plans to return to work a year later, thus doubling (or more than doubling) their income, and making the principle payments easily affordable.

  • ||

    Pro Liberate,

    Some of this paper is on second and third mortgages given through home equity loans. Those mortgages may be valueless. The problem is that an MBS is not one loan or even a number of whole loans. They are securities backed by slices of thousands of different loans. So you have a security that is backed by the income flow of 1/100th of this third mortgage home equity loan that is worth nothing and 1/50th of this 30 year ARM that is about to be foreclosed on at 1/2 of the value of the loan, and 1/100th of this 30 fixed rate mortgage that is paying and in no danger of foreclosing and so forth.

    The banks have thousands of these MBS each of which is backed by 1000s of income flows that are a percentage of 1000s of mortgages, each of which has a different priority in foreclosure, different chance of foreclosure and different value of the secured property.

    No one has any idea what these things are worth. The banks can't sell them for nothing, because doing so would make them insolvent. But no one will buy them for value because everyone knows some of them are worth nothing. Since some unknown but significant quantity of them is valued at 0, and the rest of it is of indeterminate value, they all become impossible to sell because you can't assign them a price.

    The quote above about the dubious value of innovation is a pretty good one.

  • matt2||

    Logistical question from a non-homeowner:

    At some point doesn't it become really expensive to distribute the revenue from these loans, if they're really as sliced-up as we're hearing? The homeowner's writing a check to a single (maybe different than original) source, and the money's getting split dozens/hundreds of ways?

    How does that work?

  • ||

    Yes, the MBSs and the debt acquired using them as securities is the big problem, with a huge multiplier effect. What I was getting at was the underlying notes (leaving aside the various ways mortgage "ownership" can be divided)--many of them should be worth quite a bit still. I'm leaving the realm of what I understand about all of this, but it just seems that we need to wade through a lengthy--but market-driven--valuation process, not enter into some sort of futile government bailout.

  • Mike Laursen||

    I vote that we take over Catalina Island and declare it the Democratic Republic of America.

    Many of the residents are only around part time, so they wouldn't even notice right away that you had invaded. If you do it in the summertime, they're used to being invaded every day, anyway; they might not realize that something is up until the last boat leaves and your invasion force is still hanging around.

  • ||

    Paul:

    You make a very good point, and I think you're completely correct.

    But, I was curious about the bit at the end regarding accounting standards. Can libertarians support regulation of accounting (i.e., some standardization of accounting practices), on the basis that it prevents fraud and makes information more transparent.

    Or is even that troublesome in that it prevents better ways of presenting information? E.g., Baseball players are now better-valued because the metrics used to evaluate their dollar-value have been refined. The same, theoretically, could be true in business accounting.

  • Mike Laursen||

    No one has any idea what these things are worth.

    Even so, I'm sure there are speculators who would be willing to buy if they could negotiate a bargain basement price. The sellers don't want to sell at that bargain basement price, though, when they can get their buddies in Washington to bail them out, instead.

  • ||

    "I'm leaving the realm of what I understand about all of this, but it just seems that we need to wade through a lengthy--but market-driven--valuation process, not enter into some sort of futile government bailout."


    I think that is what Paulson's approach is. The problem is that once the banks admit that they don't know what these beasts are worth, they will immediately be bankrupt. No one has the time to hold onto them long enough to figure out what they are worth.

    Paulson's idea is to buy the things at market rates and then hold them until we sort them all out at which point the government will sell them for hopefully a profit. The heart of Paulson's plan is the buy the things up and settle the market down until we can figure out what they are worth.

  • ||

    "The sellers don't want to sell at that bargain basement price,"

    If they sell them at a bargain price, they go bankrupt. The issue really is, what happens when these guys all go bankrupt. Will there be enough capital left in the market for good companies and good consumer borrowers to get credit.

    My idea is to let them all go bankrupt, let all of the toxic debt get sold on pennies on the dollar or nothing, and then loan the survivors big money to get capital moving again. I don't see why that wouldn't work just as well and have the added bonus of watching the idiots who did this go broke.

  • Mike Laursen||

    Paulson's idea is to buy the things at market rates and then hold them until we sort them all out at which point the government will sell them for hopefully a profit.

    Wasn't his original proposal to buy them at their maturity value, not market rates?

  • ||

    Wasn't his original proposal to buy them at their maturity value, not market rates?

    I think so. By market rate I meant their paper value not what the market will actually bear, which at this point is nothing.

  • Paul||

    Since some unknown but significant quantity of them is valued at 0, and the rest of it is of indeterminate value, they all become impossible to sell because you can't assign them a price.

    This is not entirely true. They aren't impossible to sell, they may be impossible to sell at a value which the originating institutions find pleasing. According to King Henry", this is called a market failure because investors are losing money where it's not in their interest.

    I agree with the slow rolling bankruptcy court option, where through proceedings, a reasonable value could be determined. What we have here is this 'carefully considered, heavily analyzed dollar figure they pulled ot of thin air' (to paraphrase Reason) to purchase these assets. The "problem" with the bankruptcy option is it takes too long for lawmakers to be comfortable. They have to do something, this is something, and so they're doing it.

    Albert:

    But, I was curious about the bit at the end regarding accounting standards. Can libertarians support regulation of accounting (i.e., some standardization of accounting practices), on the basis that it prevents fraud and makes information more transparent.

    This libertarian doesn't have a problem with accounting standards-- even those applied by legislative fiat. I don't agree with all the standards, and as we've seen, some standards are problematic. I don't think it's reasonable to gut an entire segment of business regulation without stopping to think why they were put in place to begin with.

    If Congress were merely attempting to adjust regulation here, I probably wouldn't be so upset about this. But what it's turned out to be is an opportunity to nationalize an entire industry by fiat, redirect massive amounts of tax-payer dollars for corporate welfare (I swear to christ the first liberal the mentions those words ever again will get an earful from me) without any plan-- just givaways to highly connected constituents to make it more palatable.

  • ||

    Will they all go bankrupt? That's a good question. I saw the total liabilities versus the total assets for WM, and they actually might've survived this if the OTS/FDIC hadn't freaked out over a short run on deposits. I think the market is capable of dealing with this without some huge collapse, and a good number of banks are not on the edge of destruction.

  • ||

    Got this from timesonline.co.uk article about France wanting a bail-out by the EU... it is in the comment section to the article:
    "If you had purchased $1,000 of AIG stock one year ago, you would have $42 left. With Lehman, you would have $6.60 left.
    With Fannie or Freddie, you would have less than $5 left.
    But if you had purchased $1,000 worth of beer one year ago, drank it, and recycled the cans, you would have had $214

    Steven, Colorado, USA

  • ||

    I honestly don't know if they would all go bankrupt. That is one of maddening things about this. I don't trust any of the people who are saying this is the end of the world. But I trust them just enough to wonder if maybe this time they are not lying.

  • Paul||

    Got this from timesonline.co.uk article about France wanting a bail-out by the EU... it is in the comment section to the article:

    Is there any other thing that could make me know more that this bailout is bad idea?

  • LarryA||

    Other innovations were simply devices to circumvent regulations-regulations intended to prevent the kinds of problems from which our economy now suffers.

    Except that it was the regulations that encouraged the complex solutions that caused the problems in the first place. What a regulation's title says it's intended to do is a rather poor guide to what it will actually cause to happen, even before unintended consequences kick in.

    But there is a reason we need reliable accounting.

    Reliable accounting systems should always be simple. Regulations invariably make accounting rules more complex, resulting in more ways to game the results.

    The homeowner's writing a check to a single (maybe different than original) source, and the money's getting split dozens/hundreds of ways? How does that work?

    Computers do all the calculations.

    Can libertarians support regulation of accounting (i.e., some standardization of accounting practices), on the basis that it prevents fraud and makes information more transparent.

    Yes, but not government regulation. The government will never resist sticking in practices to further special interest goals, and then sticking in more practices to fix the unintended consequences of the first set of special interest practices, and sticking in more practices... Etc.

    Instead, form an accounting society. Have it come up with a transparent accounting system that can be the standard. Allow anyone else to form another accounting society. Have it come up with a transparent accounting system that can be the standard. The market will choose the best one. Accountants using the gold standard will get more business.

    Like Underwriters Laboratories in electronics.

  • Paul||

    We should call this bill the "Rescue Act for a Prudent Economy" or RAPE.

  • ||

    Here's another one:

    An emailer to CNBC suggested a better title for the mortgage relief program was: Securitized Housing Investment Trust!

  • ||

    Taz

    I'm depressed. I'm under 30, I'd like to buy a home in the near future

    You can cheer up at the fact that home will soon be a bargain prices--although I imagine there won't be much flexibility on the "20% down" requirement.

  • squarooticus||

    a real grassroots libertarian community to get its act together and put forth the reasons why all this happened


    Ha! We can't even get all libertarians to agree that the Federal Reserve's control over the currency is the root cause of this nightmare.

    I'm still confused as to what pro-paper currency libertarians believe was the root cause of the housing bubble.

  • tarran||

    What encouraged the careless accounting? Investors thought that since much of what they were investing their money in had their returns backed by the Federal Governemnt that there was not much risk.

    What will be the message they get out of this - assuming the bailout goes through? Thhat if they invest in something 'backed' by the governemnt, no matter hos stinky the outcome, the government will save them.

    Now, imagine what would happen if the government had allowed these businesses to fail, and the investors to lose their money. The next time someone said, "don't woorry, the govt's got your back" the prospective investor would say "great, that and 20 cents willbuy you a cup of coffee, show me something I can trust. show me your books."

    People invest not based on the expectation of profit. Most people invest hoping to make money while limiting their chance of actually losing money. The more saced they are of the latter, the more they will ask questions.

  • robc||

    How does that work?

    The same way distributing dividend checks to all the owners of a corporation works.

  • Paul||

    Tarran,

    It's always prudent to ask the question: So, how are we making money on this again?

    That basic question has uncovered the root of many a Wall Street scandal and subsequent collapse. In the end, some dollars need to be sitting somewhere, with some 'real' assets and 'real capital' to back them up. It doesn't matter how exotic your instruments are, somewhere, somehow, there has to be something that can be sold or posessed which has real value.

  • Shane||

    Unfortunately, the acronym for this bill is probably pretty accurate. After all, don't you use a tarp to cover a dead carcass so that other's can't see it?

  • ||

    Squarerooticus

    I'm still confused as to what pro-paper currency libertarians believe was the root cause of the housing bubble.

    I think most libertarians understand that this problem is rooted in the massive gov't meddling in the housing market which caused price distortions and enabled mortagages to go to unqualified parties. It was triggered by the deflation of the housing bubble.

  • squarooticus||

    I think most libertarians understand that this problem is rooted in the massive gov't meddling in the housing market which caused price distortions and enabled mortagages to go to unqualified parties.



    Right. So what sort of meddling did this? I.e., what did they do that enabled these price distortions?

  • squarooticus||

    Okay, rather than belabor this through Q&A, I'll simply put my analysis out there:

    Fed makes credit (and therefore risk) too cheap.

    Congress creates mandates for lending to high-risk borrowers.

    Combination of the two causes money to flow into mortgages, many of which go to high-risk borrowers.

    Much greater number of home buyers leads to much higher prices for houses in most markets, with rises in the hottest markets being upwards of 300% over 10 years. (Somerville, MA, is a good example of this: part of that 300% is simple gentrification that pulled demand back from the suburbs, but much of it was due to increased overall demand for houses.)

    Mortgages packaged up in CDO's, valued at market rates, and sold.

    ARMs start resetting.

    Borrowers default.

    Buyer-to-seller ratio starts to come back to earth. House values drop accordingly.

    Free market valuations of CDO's therefore drop.

    Firms realize they are insolvent (even in the fucked up "modern finance" sense) through mark-to-market rules. Some go belly-up.

    Downward spiral goes on for a while.

    Fed and Treasury finally understand that deflation through unwinding is inevitable without massive infusions of cash into the financial system, and ask for a bailout.

    To paraphrase James Hetfield, "Deflation baaaaaaaaad!"

    So, what's the root cause? Simple: the Fed underpricing risk. Without that step, it would have been impossible for the housing bubble to occur, no matter *what* Congress legislated about borrowing standards. If interest rates had been determined by a free market instead of by the Fed, credit would have been much more expensive and therefore lending standards could not have been lax enough to cause the bubble.

    Note that my analysis does not require us being on a gold standard to avoid the bubble, though that certainly would have been a sufficient condition. All that is required is that the market not underprice risk, which it doesn't do when real money---rather than virgin loans created by the Fed---is on the line. Unfortunately, getting the Fed to correctly price credit all the time is (a) central planning, which we Libertarians (all?) know to be foolhardy and (b) unlikely when politicians are pulling the strings.

  • ||

    If there's any bright side to the Enron-style Wall Street bailout, it's that more people are now understanding why I voted for Ron Paul in February. The financial crisis is making him look more like the smartest man in Congress every day. Who was warning us about Fannie and Freddie and an unsustainable housing and credit bubble, anyway -- in 2002.

  • ||

    Squarerooticus-6:01

    Well said.

  • ||

    Reason magazine publishing Austrian economics?

    Someone call Lew Rockwell, I'm sure this must be a sign of the apocalypse or something.

    /Milton Friedman frowns upon your shenanigans

  • ||

    Matt --

    "At some point doesn't it become really expensive to distribute the revenue from these loans, if they're really as sliced-up as we're hearing?"

    Good question.

    That's why whoever is doing the slicing usually takes a cut (a "servicing fee") either up-front or along the way.

    In the simplest case of a pass-through MBS, the bank might collect payments at 6% from the borrower, and pass them on to the investor at 5.5%, keeping 0.5% for themselves. The precise amount of the servicing fee is accounted for by the investor when purchasing the MBS.

  • SpellingPolice||

    It's "venti," not "vente."

  • Shawn Levasseur||

    "Should we rush to pass legislation written by tired, 25-year-old legislative staffers in the middle of the night in offices littered with Domino's boxes and empty vente Starbucks cups? "

    Answering the question, whatever happend to the "Smoke filled rooms" of the past.

  • ||

    can anyone tell me what country is doing things right/significantly better

    Latvia is, for one.

    -jcr

  • ||

    Unfortunately, getting the Fed to correctly price credit all the time is (a) central planning, which we Libertarians (all?) know to be foolhardy and (b) unlikely when politicians are pulling the strings.

    Actually, the main beneficiaries of underpriced credit are the banks, which own the fed. Even if you could take the politicians out of the picture altogether, failure is still inevitable.

    The creation of money must be separated from banking.

    -jcr

  • ||

    Laments taz:
    I'm depressed. I'm under 30, I'd like to buy a home in the near future, .....
    No reason to be depressed. Take $18K, buy 20 1 ounce gold coins, and soon you will be able to buy your house without borrowing any money.

  • ||

    A college buddy of mine sent our trusty Austrian-trained college professor an email this week asking his opinion on the bailout. Of course his response was as predictable today as it would have been 15 years ago in the lecture hall. It's not so amazing that people committed to freedom are not easily dissuaded from its virtue and modern utility. Mr. Kibbe, you might want to rent a motorcoach in case a few other Austrians stumble out of their foxholes--a few of them might even run for office--mumbling the writings of Menger.

  • geniusiknowit||

    I was about to give up Reason for good, but then I found this article. Some of you "libertarians" are beginning to see the light! :-)

  • Paid to be Rich||

    Congress just saw all those millionnaires begging on the street and felt sympathy.

  • nonPaulogist||

    Nice to see Reason featuring some Austrian thought. I hope you don't get excommunicated from the Church of Friedman.

    Mises and co. have the only rational explanation for the recent economic developments.

  • ||

    " Didn't Bank of America have to issue a statement the other day saying, "We're doing fine."

    But, but...isn't Bank of America the crazy folk who let people have credit cards without passports or green cards?

  • Westmiller||

    The Republican Liberty Caucus was very outspoken on the bailout: "NO!"
    http://www.rlc.org/rlc-resources-links/toolbox/693pressrelease/

  • ||

    I know that you've built a little ideological box around your brain... But can't you see when an ideology makes no sense? Of course this was a classic boom and bust cycle driven by cheap credit and easy money, but no Government ever needs to 'bully' businessmen to take risks, no matter how risky, when those businessmen see easy money or suckers to beat out. You make the mistake of confusing the concept of Government with its reality, and then using its reality to justify denying the importance of Government.

    Your theories need revision based on reality. This meltdown ought to be making you look at your theories again, not repeating the same talking points that helped create this mess in the first place. You need to skip the AE meeting and Attend An AEA meeting. (Austrian Economics Anonymous).

    You need intervention.

  • Intervention intershmention||

    Your points, I contest. If reality is adjusting to absurd self-serving legislation by protected legislators, so be it. Nevertheless, there is no meltdown other than the value of the dollar over time, you pathetic hack.

  • ||

    To the eminent, all knowing, Chris:

    Tis' been the Austrians who've been out screaming of this very thing these many decades past-and no one but the Austrians, confuse them with the Chicago School you do, Laddie.

    You're boy Keynes be what brought this about(with dear Friedman, Greenspan, and yes Reagan's misguided help to be sure)and you turn back to the bottle.

    Tis' you in need of intervention. Mend your ways or the Devil take you, son.

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