The Most Promising Lede of the Week

Matt Welch | September 15, 2008

From funnyman economist/TV personality Ben Stein:

Earlier this month I was flying home to Los Angeles from the Republican National Convention in St. Paul, which I attended as a pundit, not a politician. Sitting next to me on the flight was a charming young man named Tom Morello. Ruthless questioning elicited the fact that he is the lead guitar for a fabulously successful band called Rage Against the Machine.

But instead of spinning this material into an Odd Couple-style comedy of manners, the former Nixon speechwriter (website here) uses it as an opportunity to probe the perennial, bipartisan, and futile crusade against Washington "waste, fraud and abuse," and then pivots in favor of federal regulation:

Then there is that aspect of the war against Washington in which candidates -- very often, my fellow Republicans -- rage against the machine of regulation. Indeed, this is a constant refrain of the conservatives I call my pals. Regulation is stifling growth and entrepreneurship, they say.

With respect, I don't see it. Look at the major debacles in the economy in the past quarter-century. The junk-bond scandal of the 1980s was largely a result of a failure of regulation. The tech boom of the 1990s and the subsequent bust were greatly facilitated by a lack of regulation over fiduciary behavior by underwriters and investment banks. The problem was not too much regulation, but far too little.

Or look at the current financial madness caused by wildly imprudent lending by major banks and investment banks. Basically, a major piece of deregulation, the Gramm-Leach-Bliley Act, overturned most of the laws that had kept commercial banks and investment banks separate. This made it much easier for monster-size banks to lay down enormous bets on the direction of housing prices.

I don't agree with Stein–for one thing, I'm not sure what special "regulation" was required for the dot-com bust of 2000, and the tech boom that both proceeded and succeeded it continues to be a wonderful thing indeed. Also, most entrepreneur-stifling regulations occur at the local, not federal, level, and they can stifle to the point of sending perfectly good people to jail.

But it's interesting to see the re-regulatory mindset at work. Somewhere, somehow, people were making money in new-sounding ways. When enough of them started to lose money, it's time to Do Something. That is a powerful urge in any season, and it sure seems to be gathering steam in 2008.

reason on Ben Stein here; on Tom Morello here.

Comments

|9.15.08 @ 10:13AM|#

If deregulation leads to economic disaster, then by golly, we'll come up with a REASON why economic disaster is a good thing.

|9.15.08 @ 10:16AM|#

Ben Stein is starting to piss me off. That movie he put out in defense of creationism was whack in the extreme, too.

JMR|9.15.08 @ 10:20AM|#

The problem with regulation is when it fails, proponents always get MORE spending for the failures. This *will* happen again.

matt2|9.15.08 @ 10:22AM|#

a major piece of deregulation, the Gramm-Leach-Bliley Act, overturned most of the laws that had kept commercial banks and investment banks separate.

This seems to miss the point. Stand-alone i-banks, largely unaffected by Gramm-Leach-Bliley, are failing left and right. Morgan Stanley and GS remain, but for how long?

The commercial banks with i-banking arms are thriving in a relative sense, picking up entire firms (and highly valued employees) at cut rate prices. When the panic subsides, the winners will likely be JP Morgan, BOA, etc., a result that would have been impossible before the aforementioned deregulation.

Zarathustra|9.15.08 @ 10:24AM|#

Also, most entrepreneur-stifling regulations occur at the local, not federal, level, and they can stifle to the point of sending perfectly good people to jail.

And on that note...

|9.15.08 @ 10:26AM|#

Ben is a very intelligent and nice man (and a good tipper), but he is a great example of what Shermer was talking about in his book Why (Smart) People Believe Weird Things.

|9.15.08 @ 10:39AM|#

I recall reading a Reason article, back in the S&L scandal days, where the author concluded that we were in fact privatizing risks while socializing rewards - and any society that does that deserves every S&L scandal it gets. I'm all for deregulation, but it still has to be done intelligently.

As to whether that has anything to do with the current financial sector woes, I have no idea. I'm not one of the folks who gives that a grokking.

|9.15.08 @ 10:40AM|#

Ugh - that was in fact "privatizing rewards while socializing risks". Duh!

libertarian democrat|9.15.08 @ 10:44AM|#

I don't think Ben Stein is an idiot, but of all defenses of ID, his Expelled: No Intelligence Allowed was one of the weakest I've known. There are good arguments for why ID is a possibility, but he instead, like many documentary filmmakers, relied on biased editing and shooting.

On the other hand, it had the best unintentionally ironic title ever.

libertarian democrat|9.15.08 @ 10:44AM|#

Maybe some sort of corollary to Joe'z law

shoefly|9.15.08 @ 10:48AM|#

Well, wasn't the "wildly imprudent" lending of the banks mostly enforced on them by legislative acts passed way back in the day (Carter times?...Kotter times?) that demanded banks give out loans to people without proper credit ratings or collatoral? I have some vague recollection of this. If so, that's bound to lead to moral hazard and banking catastrophe at some point (whether such acts were well-intentioned or not). If so, that's a failure of gubmint, not the private sector.

|9.15.08 @ 10:49AM|#

From funnyman economist/TV personality Ben Stein

Stein is a funny man. I liked his game show, and generally enjoy him as an entertainer. But he is as disgusting bottom feeding neocon whack job as you'll ever come across.

classwarrior|9.15.08 @ 10:58AM|#

Ralph Nader's father had it right when he told his son that capitalism would survive because socialism would always rescue it. The "making money in new-sounding ways" involved taking risks that would have been unimmaginable (and illegal) for previous generations of financiers. These cowboys pressed for deregulation, secure in the knowledge that if things went bad, the government would have no choice but to bail them out, because otherwise too many innocents would be hurt in the ensuing panic. Contributors here routinely (and correctly) call religeous fundamentalists for ignoring evidence contrary to their beliefs, but market fundamentalists are almost as bad.

|9.15.08 @ 11:00AM|#

Surprise, surprise; a neocon douchebag who also happens to be a creationist is pro-regulation. I would say I can't wait for the GOP to get slaughtered in payback for what it has become but unfortunately McCain is on a roll.

|9.15.08 @ 11:14AM|#

"wasn't the "wildly imprudent" lending of the banks mostly enforced on them by legislative acts"

It was called the Community Relations Act and yes banks were forced to comply. It's just a wonder that the collapse didn't happen earlier. But typical of so many, including ignorant neocons, to blame deregulation for this.

JMR|9.15.08 @ 11:21AM|#

How about this one, though:

http://www.philly.com/philly/wires/ap/news/world/20080914_ap_cubaagainrefusesusdisasteraidinstormswake.html

"Commies refuse US government subsidies, and suggest more capitalism instead."

Neu Mejican|9.15.08 @ 11:23AM|#

"privatizing rewards while socializing risks"

Spot on.

Regulations that work are good.
Regulations that stifle are bad.
As always, the devil is in the details and it is an iterative process with each failure/success combo theoretically leading to a positive tweak. The interplay between top-down forces and bottom-up innovations will always be dynamic.

Yadda Yadda...

|9.15.08 @ 11:39AM|#

If deregulation leads to economic disaster, then by golly, we'll come up with a REASON why economic disaster is a good thing.

Easily done. Google "creative destruction." Also, you might look into the Japanese economy over the last 20 years or so. They tried to "regulate" out any sharp corrections, and have been rewarded with a seemingly permanent recession instead.

Regulations that work are good.

Depends on what you mean by "work."

|9.15.08 @ 11:44AM|#

As someone who has to worry about how my University complies with GLBA I'm a little astonished to say it constitutes 'deregulation'. Seems pretty regulatory to me. Not that all the things it requires are actually bad ideas (like safeguarding private information) but sure doesn't look like Open Skies to me.

Russ 2000|9.15.08 @ 11:48AM|#

Since Obama is a product of Chicago machine politics, wouldn't Morello be raging in FAVOR of the machine?

BakedPenguin|9.15.08 @ 12:14PM|#

Ralph Nader's father had it right when he told his son that capitalism would survive because socialism would always rescue it.

Funny, I thought the exact reverse was true.

OK|9.15.08 @ 12:29PM|#

so the guy from the administration that regulated ground beef prices thinks regulation is good.

BakedPenguin|9.15.08 @ 12:36PM|#

Erm, "exact opposite" would probably be a better phrase.

MAX HATS|9.15.08 @ 1:06PM|#

Can anyone name a single example of a modern, libertarian economy?

No?

So is the whole world stupid or something?

Elemenope|9.15.08 @ 1:16PM|#

Can anyone name a single example of a modern, libertarian economy?

Drug Trafficking.

Prostitution.

(In America, obviously.)

|9.15.08 @ 2:06PM|#

I first encountered Ben Stein in some articles he wrote for Barron's back in the early nineties on Michael Milken. According to Stein, Milken is the worst villain ever.

The way Stein told it he led the lych mob in the press at the time of MM's trial and he couldn't be prouder.

Since noone has ever adequately explained to me exactly what Milken did wrong I formed a highly negative opinion of Stein.

|9.15.08 @ 2:08PM|#

Max,

Hong Kong, Singapore and Ireland and Slovakia are getting there.

Is the rest of the world stupid? Well, just about all of Africa and South America are run by dysfunctional, corrupt (stupid) governments. Zimbabwe is running about 10 million percent inflation annually (that's the most extreme example, though). China and Vietnam are doing well because they liberalized their economies in the 80s. Let's see, the UAE and the middle east are sitting on oil reserves that fund their suppressive, fascist theocracies or burgeoning economies. Western Europe 100 years ago looked a lot more libertarian than they do today which is why they are able to waste their money and talent so freely now - because they have such strong foundations rooted in that history. South Korea looks good enough by world standards, North Korea...not so much. I don't know, the short answer is that the rest of the world is "stupid". But, whether they can afford to be stupid or not is a different question.

Neu Mejican|9.15.08 @ 3:15PM|#

RC Dean,

ME: Regulations that work are good.

YOU REPLY: Depends on what you mean by "work."

This is true, it always matters how you measure success. Any regulation that does not include a quantifiable, objective way to measure its success is not worth the paper it is written on.

The goal of the regulation should be clear.
The effect it hopes to achieve should be measurable.

|9.15.08 @ 3:18PM|#

It was called the Community Relations Act and yes banks were forced to comply.

The loans provided under the CRA have a much LOWER default rate than those made in the same neighborhoods by non-CRA-compliant lenders. Not only does the CRA include significant efforts to educate and counsel borrowers (Google "Don't Borrow Trouble"), but there are also much more stringent standards and certifications to ensure that the loans are actuall affordable for the people taking them out.

It's a nice little story that some people tell each other to blame this problem on do gooders, but it's just not true.

Neu Mejican|9.15.08 @ 3:19PM|#

Travis2,

Hong Kong, Singapore and Ireland and Slovakia are getting there.

Singapore ain't exactly a symbol of freedom and liberty.

Although Singapore does not hand out the death penalty randomly, Amnesty International states that Singapore has one of the world's highest rates of execution relative to its population. Reuters journalist Amy Tan reported that the Singaporean government has hanged 340 people between 1991 and 2001. According to the Think Center, a Singaporean civil rights group, 70 percent of those executions were for drug offences. By comparison, Canada executed 710 people between 1867 and 1962 before the death penalty was abolished in 1976.

For those lucky enough to escape hanging, caning may be the punishment prescribed for roughly 30 crimes in Singapore, including attempted murder, armed robbery, immigration offences, and vandalism. Secretary General of the Singapore Democrats and former political prisoner, Dr. Chee Soon Juan spent five weeks in a Singapore prison for refusing to pay a fine he received for violating a law restricting public gatherings.

http://www.langara.bc.ca/creative-arts/publishing/prm/2003/singapore.html

|9.15.08 @ 3:22PM|#

Google "creative destruction."

Creating destruction is the damage done to existing players in the economy as superior methods or practices defeat them in the marketplace.

Once upon a time, the cowboy capitalists who brought us Enron and mortgage-backed securities were saying that they were wreaking creating destruction on their competitors. They don't say that so much any more.

This collapse isn't happening because investors found an even better place to put their money. It's not happening because something better has come into being. You can't just look at every bad outcome in the economy and congratulate yourself for knowing, without evidence, that you're witnessing progress.

|9.15.08 @ 3:29PM|#

Neu Mejican,

Clearly. I was responding to a question about the existence of modern libertarian *economies*.

Neu Mejican|9.15.08 @ 3:32PM|#

Travis2,

Drug dealing is an economic activity.

Neu Mejican|9.15.08 @ 3:33PM|#

Societies which kill people for engaging in unapproved economic behavior can not be used as symbols of libertarian economies.

Full stop.

|9.15.08 @ 4:31PM|#

I get what you mean, but there are definitely economic activities that are never okay. Hiring a hit man is a good example, paying someone to "steal" your car in order to commit insurance fraud is another. And, drugs fall under social/political freedoms more often than not. There's no question that those places are unfree in many ways, though.

Andy|9.15.08 @ 4:49PM|#

Just a theory, but is Ben Stein trying to capitalize on the zeitgeist here? A conservative who "admits" that free markets are just scams that benefit the rich! Just what liberals knew all along?

But then how does his weird "scientists are Nazis" movie fit in? Actually, I don't care.

MAX HATS|9.15.08 @ 5:24PM|#

Hong Kong, Singapore and Ireland

I don't know anything about Slovakia, but if you think the above three economies are free of financial regulations, you're high.

The following are literally the first hits on google of (country name)+financial+regulations:

http://www.lowtax.net/lowtax/html/hongkong/jhksec.html

http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=2ABFFA308177855A52BC49401504DC1D?contentType=Article&contentId=1654063

http://www.imf.org/external/pubs/cat/longres.cfm?sk=17332.0


All detail regulatory structures and systems. The question is not whether or not to regulate the financial industry. Reasonable people can go back on forth on any particular piece of legislation. But being solidly against all regulation is pie-in-the-sky fantasy.

Neu Mejican|9.15.08 @ 5:49PM|#

Travis2,

I get what you mean, but there are definitely economic activities that are never okay. Hiring a hit man is a good example...

Sure, but you are missing the point. Singapore will execute you for engaging in unapproved economic activity. This is not an example of executing you because you hired a hit man and killed someone else, which might be justifiable under a libertarian regime, but this is a matter of the state killing you because you engaged in economic activities outside the realm approved by the state.

Again, if you execute citizens based on their engaging in economic activity that is not approved by the state, you can be used as an example of a libertarian economy. Full stop.

Max Hats,
Nuance is not allowed in these discussions.

;^)

|9.15.08 @ 5:55PM|#

Let's see, the UAE and the middle east are sitting on oil reserves that fund their suppressive, fascist theocracies or burgeoning economies.

The UAE has a suppressive fascist theocracy? You are an ignorant fool.

gaptoothed|9.16.08 @ 1:33AM|#

The CRA actually refers to the Community Reinvestment Act. Started under Carter, strengthened under Clinton....hey, that should be a song....

But I'll bet there's more to joe's story.

Jim|9.16.08 @ 8:46AM|#

There could have been a residual effect from the CRA. The residual effects could have led to greater general confidence in the ability of people with weak credit histories to take out loans (from a perceived view that other such measures not unlike the CRA would come along). Banks and other lending institutions could have been likewise inspired to be more flexible in lending practices with a perceived view that government might step in with other measures to bail them out should there be defaults.

Jim|9.16.08 @ 9:06AM|#

Fannie and Freddie are of course also part of this residual effect (economic butterfly effect?).

|9.16.08 @ 9:13AM|#

Anon,

No, I'd call the UAE a burgeoning economy.