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.

Comments

[The Extispicator]

Well said. Ditto.

That is one of the most concise statements I have ever seen of my philosophy on government.

[Jiff Wooods]

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]

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.

[libertarian democrat]

Well said.

[Dagny T.]

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]

Prediction: The regulatory agencies that were supposedly protecting us from this clusterfuck will, when it's over, get MORE tax money.

[joe]

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.

[:-(]

give it a rest joe

two days in a row is too much

[Episiarch]

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]

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.

[Ra?ionalitate]

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]

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]

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]

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.]

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]

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]

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.

[Atabrat]

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]

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]

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]

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]

Correction: "subsidized" - someone needs to expand his horizons beyond The Economist.

[Invisible Finger]

I need rules - I need GAAP and FASB.

Ironically, the government purposely violates those exact rules in order to claim solvency.

[alan]

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]

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.

[Episiarch]

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.

[joe]

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.

[joe]

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]

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]

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.

[joe]

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.]

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]

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]

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]

joe,

That's the post I commented on, after all.

I was responding to your comment on matt2's post, not Radley's.

[Franklin]

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)

[Episiarch]

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.]

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.

[Episiarch]

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.

[NickM]

joe - compare Bank of America with Washington Mutual. Same regulatory regime, very different outcomes.

[Dagny T.]

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]

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.

[TrickyVic]

Bush in office = financial bailout. That family is 2 for 2.

[Russ 2000]

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]

The Federal Government won't go out of business...until it does. Buy your guns now.

[alan]

A near-perfect ass, right?

Just an observation 😉

Oh, you two, get a room and don't forget to bring a camera.

[cunnivore]

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]

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?

[libertarian revolutionary]

I'd like to put the feds out of business.