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Because No One Does Fiscal Reponsibility Like the Federal Government
Over the last few days, both major party candidates have said Wall Street is out of control, and needs more and better federal regulation. Barack Obama has mocked the concept of the “ownership society,” which is the sensible idea that people should have control over their own lives. John McCain has promised to rein in the “greed” and “self interest” on Wall Street. Both promise a tighter regulatory structure, as do leaders of both parties in Congress.
Here’s my question: The federal government is currently running a $400 billion deficit. If we never add a new federal government program, taxpayers are still on the hook for $59 trillion in unfunded future Medicaid, Medicare, and Social Security liabilities.
Nevertheless, both McCain and Obama are still making wildly expensive promises, and proposing a wide array of new federal programs. Not exactly the models of fiscal restraint, these two.
Yes, markets can be brutal. And it’s never pleasant to watch a correction unfold in real time. I’m certainly dreading the sight of my next 401(k) statement. But even the shadiest of corporations wouldn’t attempt the the shenanigans the federal government employs to hide its liabilities from taxpayers. When it comes to cooking the books, Congress can throw down with Bobby Flay. When it comes to solvency...well...$59 trillion.
All of which makes it a pretty dubious proposition that we’d be better off today if only we’d given more power to our noble politicians to safeguard the public interest from greedy corporations.
The Extispicator|9.16.08 @ 1:54PM|#
Well said. Ditto.
That is one of the most concise statements I have ever seen of my
philosophy on government.
|9.16.08 @ 1:55PM|#
LOL, Wallstreet is not the only one out of control here. It goes
far beyond that I tell you.
Jiff
http://www.datools.net.tc
Chamomiles Davis|9.16.08 @ 1:55PM|#
Here's my question: The federal government is currently
running a $400 billion deficit. If we never add a new federal
government program, taxpayers are still on the hook for $59
trillion in unfunded future Medicaid, Medicare, and Social Security
liabilities.
Technically speaking that's not a question, but you raise a good
point nonetheless.
Dagny T.|9.16.08 @ 2:01PM|#
All of which makes it a pretty dubious proposition that we'd
be better off today if only we'd given more power to our noble
politicians to safeguard the public interest from greedy
corporations.
What scares me is that now, post-Lehman, the question isn't "should
we have more regulations?" but "what kind of regulations should we
have?"
You've got guys from Fortune and the WSJ agreeing with
Krugman(!) on Larry King, and McCain talking about regulating
executive compensation. I need a stiff drink.
JMR|9.16.08 @ 2:03PM|#
Prediction: The regulatory agencies that were supposedly protecting us from this clusterfuck will, when it's over, get MORE tax money.
|9.16.08 @ 2:04PM|#
All of which makes it a pretty dubious proposition that we'd
be better off today if only we'd given more power to our noble
politicians to safeguard the public interest from greedy
corporations.
So, how are the much-more-heavily-regulated banks doing?
Oh, right, they're stripping the carcasses of the freer, more
dynamic investment houses.
|9.16.08 @ 2:18PM|#
You've got guys from Fortune and the WSJ agreeing with
Krugman(!) on Larry King
Seriously? I mean, you watch Larry King? Seriously? You have a
strong stomach.
Econ 101|9.16.08 @ 2:18PM|#
Teetering between Friedman and Kenyes (excerpt)
Liberal cycles, historian Arthur Schlesinger believed, succumb to
the corruption of power, conservative cycles to the corruption of
money.
Both have their characteristic benefits and costs. But if we look
at the historical record, the liberal regime of the 1950s and 1960s
was more successful than the conservative regime that followed.
Except for China and India, whose economic potential was unleashed
by market economics, economic growth was faster and much more
stable in the Keynesian golden age than in the age of Friedman; its
fruits were more equitably distributed; social cohesion and moral
habits better maintained. These are serious benefits to weigh
against some business sluggishness.
Of course, history never repeats itself exactly. Circuit-breakers
are in place nowadays to prevent a 1929-style slide. But when the
system seizes up as it has now, we are clearly in for a new round
of regulation.
The cycles in economic fashion show how far economics is from being
a science. One cannot think of any natural science in which
orthodoxy swings between two poles. What gives economics the
appearance of a science is that its propositions can be expressed
mathematically by abstracting from the real world.
The classical economics of the 1920s abstracted from the problem of
unemployment by assuming that it did not exist. Keynesian
economics, in turn, abstracted from the problem of official
incompetence and corruption by assuming that governments were run
by omniscient, benevolent experts. Today's "new classical
economics" abstracted from the problem of uncertainty by assuming
it could be reduced to measurable, hedgeable risk.
A few geniuses aside, economists frame their assumptions to suit
existing states of affairs, then invest them with an aura of
permanent truth. They are intellectual butlers, serving the
interests of those in power, not vigilant observers of shifting
reality. Their systems trap them in orthodoxy.
When events coincide with their theorems, the orthodoxy they
espouse enjoys its moment of glory. When events shift, it becomes
obsolete. As Charles Morris wrote: "Intellectuals are reliable
lagging indicators, near-infallible guides to what used to be
true."
Lord Skidelsky is professor emeritus of political economy at
Warwick University, England, and author of a prize-winning Keynes
biography.
Raționalitate|9.16.08 @ 2:20PM|#
Barack Obama has mocked the concept of the "ownership
society," which is the sensible idea that people should have
control over their own lives.
Obama does have a point - Bush and Congress' tendencies to
"encourage" homeownership by subsidizing and encouraging mortgage
lending did seem to have at least something to do with the subprime
crisis. And though Obama probably doesn't give a shit, it's also
relevant to note that not all "ownership" is pro-market, as we've
seen.
shrike|9.16.08 @ 2:27PM|#
As an investor this topic always highlights the dimwittedness of
hyper-libertarians to me. I need rules - I need GAAP and FASB. I
need Sarbanes-Oxley. Commercial banks need rules too -- like it not
being legal for them to invest customer deposits in common stock.
It is a good rule - don't be a fucking bank with Fed privileges if
you don't like it.
Just last week the Fed announced that it will take I-bank common
stock as collateral for borrowing - this is a massive disaster
waiting to happen. Now AIG wants to borrow directly from the
Fed.
Libertarianism/Freedom is a default position that works - the
blurry lines of interaction between government and private business
need regulation.
Its like the high stakes golf I play - rules limit the possibility
of an inferior player winning. We play USGA - not Libertarian
golf.
srjenkins|9.16.08 @ 2:33PM|#
I believe the phrase is Lemon Socialism. You make the public take on all the risks and run the spiraling down the toilet businesses (whether it is government or your employees), and you privatize the profits. Tails I win and heads you lose. Brilliant!
robc|9.16.08 @ 2:35PM|#
joe,
Oh, right, they're stripping the carcasses of the freer, more
dynamic investment houses.
The investment houses that shorted the housing market instead of
going long are thriving. And rolling around in Scrooge McDuck style
piles of cash and jewels.
Dagny T.|9.16.08 @ 2:37PM|#
I mean, you watch Larry King? Seriously? You have a strong
stomach.
It's on when I'm at the gym, and if I don't bring a DVD I'm forced
to watch something while on the boring elliptical. I can't
wait for college basketball to start so I can stop the madness.
classwarrior|9.16.08 @ 2:37PM|#
Radley, your argument is somewhat dishonest in that you would still oppose regulation if the government was running a surplus. The whole point of financial regulation is transparency and accountability, which are necessary for any properly functioning market. Just because because voters are stupid enough to swallow the lies of politicians (often in defense of the "free market") doesn't mean we should put up with games played with our savings and pensions.
robc|9.16.08 @ 2:41PM|#
shrike
I need GAAP and FASB. I need Sarbanes-Oxley.
GAAP may be going away (this is a bad thing, btw). You dont need
S-O.
classwarrior,
The whole point of financial regulation is transparency and
accountability, which are necessary for any properly functioning
market.
Only to a limited point. A market can function properly with
asymmetric information. Arbitragers will take care of the
imbalances.
|9.16.08 @ 2:46PM|#
I heard McCain's economic advisor (or one of them) on NPR's
Morning Edition, and what he said made some sense. Instead of all
these various oversight agencies with all these different rules,
have a more efficient (his word) system that's the same across the
board, otherwise everyone will always find the loopholes and
exploit them. The host (Robert Seigel?) said, "But wouldn't that
LESS regulation for some?" and the guy just repeated that it could
be more efficient. Then the host pointed out that McCain has been
saying he's for de-regulation for all this time, but now he's for
more regulation. The advisor sounded like he was thinking "Oh shit,
my boss has been talking out his ass again." Anyway, my point is
that at least McCain's advisor sounded reasonable, even if his boss
doesn't so much lately... or at all.
And listening to NPR for the last couple days, you would have no
idea that the government had any hand in this Freddie/Fannie mess
(okay: duh), whereas Rush Limbaugh was all over it (okay: again,
duh, maybe, but I've never listened to Rush before--just stuck in
AM hell in central Washington).
Invisible Finger|9.16.08 @ 2:46PM|#
Bush and Congress' tendencies to "encourage" homeownership
by subsidizing and encouraging mortgage lending did seem to have at
least something to do with the subprime crisis.
Only if you're willing to delude yourself. This asinine fed policy
started under Clinton's watch. Bush certainly did nothing to reign
it in, but let's not forget that big (largely Democrat) cities
loved the increased tax revenues and government pension funds were
the loudest voices in wanting E-Z credit being such large holders
of entities like Fannie and Freddie.
Obama's rhetoric (and to a slightly lesser extent McCain's) has a
certain "blame the Jews" mentality about it.
matt2|9.16.08 @ 2:46PM|#
joe:
Those more heavily regulated banks are also heavily subsidised by
the FDIC, lending stability at taxpayer expense. It's not as cut
and dry as you're pretending.
alan|9.16.08 @ 2:46PM|#
So, how are the much-more-heavily-regulated banks
doing?
Oh, right, they're stripping the carcasses of the freer, more
dynamic investment houses.
The Bank of America deal would not have been possible without the
deregulation allowed by the Graham-Leech Act that you have maligned
earlier as area that needs re-regulation (commercial - investment
bank interaction).
matt2|9.16.08 @ 2:48PM|#
Correction: "subsidized" - someone needs to expand his horizons beyond The Economist.
Invisible Finger|9.16.08 @ 2:49PM|#
I need rules - I need GAAP and FASB.
Ironically, the government purposely violates those exact rules in
order to claim solvency.
alan|9.16.08 @ 2:51PM|#
The whole point of financial regulation is transparency and
accountability, which are necessary for any properly functioning
market.
The stated rhetorical purpose of regulation is what you describe,
but because the matter is inherently political instead of market
driven that is never how it works out. Instead Fannie and Freddie
are the norm and not the exception.
The Extispicator|9.16.08 @ 2:52PM|#
A true libertarian position does not mean nothing to ensure accurate information, the absence of fraud, milking, etc. I think, at its base, libertarian philosophy will allow that for the market to work there needs to be a government to enforce contracts, punish crime, and civil courts to provide remedies for fraud, breaches of fiduciary duty, etc.
|9.16.08 @ 2:53PM|#
It's on when I'm at the gym, and if I don't bring a DVD I'm
forced to watch something while on the boring elliptical
I see. I would say don't do the elliptical, but when I think about
the positive effects of the elliptical, I can't endorse that. Just
remember your DVDs.
|9.16.08 @ 3:03PM|#
matt2,
I'm not arguing that it's cut and dried. I'm arguing that it is
not, and that treating the complicated issue of regulation,
backstopping, and subsidy (and their interactions) as "government"
is some undifferentiated mass whose effect is only to be considered
by looking at the worst fiscal situation any department is in and
extrapolating is silly.
If your answer to a question on this topic doesn't require you to
actually know anything about the regulations and their effects, you
belong in church.
|9.16.08 @ 3:05PM|#
alan,
The Bank of America deal would not have been possible without
the deregulation allowed by the Graham-Leech Act that you have
maligned earlier as area that needs re-regulation (commercial -
investment bank interaction).
Nor would it have been necessary, if the non-banks had been
subjected to a similar regulatory regime as banks.
alan|9.16.08 @ 3:06PM|#
A true libertarian position does not mean nothing to ensure
accurate information, the absence of fraud, milking, etc. I think,
at its base, libertarian philosophy will allow that for the market
to work there needs to be a government to enforce contracts, punish
crime, and civil courts to provide remedies for fraud, breaches of
fiduciary duty, etc.
Understood, and that is a good summary of the Minarchist creed.
However, we cannot get there from here from the trajectory as
stated by
the reaction to the current crises when all of the political
players are
invested in a heavy handed approach which will expand Washington
yet again, as a political and economic juggernaut just as 9-11 did
under the excuse of expanding the security state.
robc|9.16.08 @ 3:11PM|#
joe,
If your answer to a question on this topic doesn't require you
to actually know anything about the regulations and their effects,
you belong in church.
This is only true if you care about utility. You dont need to know
about the effect of the regulations if you dont care about the
results.
You are correct if someone is blindly arguing that things would be
"better" without regulation. You are wrong is someone is arguing
that things would be "freer" without regulation. As you (should)
know, we get a mix of both here.
|9.16.08 @ 3:15PM|#
robc,
This is only true if you care about utility. Agreed.
But Radley's was a utilitarian argument; the government can't keep
companies on the straight-and-narrow. That's the post I commented
on, after all.
Dagny T.|9.16.08 @ 3:16PM|#
but when I think about the positive effects of the
elliptical, I can't endorse that.
A near-perfect ass, right? Plus the added benefit of not totally
destroying my joints by constantly running.
Just remember your DVDs.
Yes. I was bringing It's Always Sunny in Philadelphia, but
people would look at me funny when I'd laugh out loud. The one
where they go on welfare= win. Good call, there.
alan|9.16.08 @ 3:16PM|#
Nor would it have been necessary, if the non-banks had been
subjected to a similar regulatory regime as banks.
Wachovia is under the same regulatory regime as Bank of America,
yet look at the problems that institution is facing (as someone who
was shopping for a business loan in 2000, I can tell you Bank of
America and Wachovia
practices were quite a bit different).
Failures will occur no matter what (someone once wrote something
about mice and men), but allowing institutions like Freddie,
Fannie, Lehmen, Bears Sterns to liquidate in the most effecient
manner possible serves the greater good as the alternative to
correction is delay.
matt2|9.16.08 @ 3:16PM|#
joe:
I'll agree that there's a great deal of nuance involved. You were
advancing the argument that heavily regulated banks are currently
doing better than less regulated banks, ceteris paribus. This
ignores too many factors to be a valid comparison.
robc|9.16.08 @ 3:18PM|#
joe,
That's the post I commented on, after all.
I was responding to your comment on matt2's post, not Radley's.
Franklin|9.16.08 @ 3:22PM|#
Because one small segment of the population is dishonest and the
bulk of the rest of the population is too stupid to take care of
themselves, government must control reins of all businesses to
prevent stupid people from being hurt by dishonest people and/or by
themselves.
It's all for the greater good. (tm)
|9.16.08 @ 3:28PM|#
A near-perfect ass, right?
Just an observation ;-)
I was bringing It's Always Sunny in Philadelphia, but people
would look at me funny when I'd laugh out loud. The one where they
go on welfare= win. Good call, there.
All right! I'm glad you took my recommendation. There is plenty
more to enjoy and season 4 starts on FX on Thursday.
Dagny T.|9.16.08 @ 3:45PM|#
Just an observation ;-)
You wouldn't be the first. =P
I'm glad you took my recommendation.
Your good taste has been officially confirmed.
season 4 starts on FX on Thursday.
I'm terrible for always waiting until things come out on NetFlix. I
may break that tradition this time.
|9.16.08 @ 4:02PM|#
You wouldn't be the first.
I'm sure ;-D
Your good taste has been officially confirmed.
Good to know. Comedy is hard to recommend, because tastes vary so
widely. But your love of Arrested Development boded
well.
|9.16.08 @ 4:09PM|#
joe - compare Bank of America with Washington Mutual. Same regulatory regime, very different outcomes.
Dagny T.|9.16.08 @ 4:28PM|#
your love of Arrested Development boded well.
I'm of the opinion that that bodes well for a person's character in
general. Forget politics and ideology; people who don't get that
show are not to be trusted.
I'm sure
Having nothing but conjecture to go on, you came to a remarkably
accurate conclusion. Well played.
armchairpunter|9.16.08 @ 4:41PM|#
I demand the freedom to fail.
Fraud is nothing new and the laws necessary to combat it have been
on the books for centuries.
There is no new or recent law or regulation or board of overseers
or consortium of fairy godmothers that can prevent market failure
without seriously hampering the prospects for market success and,
more importantly, freedom.
I do not believe GAAP was originally a government invention, but a
development of private auditors. More recently, the SEC has decided
to adopt/co-opt the standards and essentially codify them. It has
also hijacked the large private accounting firms, for all intents
and purposes. Originally, though, GAAP was the standard by which
you needed to abide if you wanted a reputable accounting firm to
perform your audit. Seems to have been a voluntary, market-based
solution.
Russ 2000|9.16.08 @ 4:57PM|#
compare Bank of America with Washington Mutual. Same
regulatory regime
Not true. WaMu is organized as a thrift and is suject to OTS
regulation, BofA is not a thrift and is not subject to OTS
regulations.
JB|9.16.08 @ 6:14PM|#
The Federal Government won't go out of business...until it does. Buy your guns now.
alan|9.16.08 @ 9:00PM|#
A near-perfect ass, right?
Just an observation ;-)
Oh, you two, get a room and don't forget to bring a
camera.
cunnivore|9.16.08 @ 11:09PM|#
Government
announces $85 billion loan to save AIG
The only question now is, who will step in to save the government's
balance sheet?
jtuf|9.17.08 @ 10:02AM|#
Congress does not have much incentive to worry about the national debt. If the ferderal government defaults on its debts, who is going to argue?
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