The Eternal Death of Libertarianism

Writing in both Newsweek and Slate, Jacob "In Defense of Government" Weisberg blames the recent financial crisis on, then declares the official death of, libertarianism. Here's how it begins:

A source of mild entertainment amid the financial carnage has been watching libertarians scurry to explain how the financial crisis is the result of too much government intervention, not too little. One line of argument casts as villain the Community Reinvestment Act, which prevents banks from "redlining" minority neighborhoods as not creditworthy. Another theory blames Fannie Mae and Freddie Mac for subsidizing and securitizing mortgages with an implicit government guarantee. An alternate thesis is that past bailouts encouraged investors to behave recklessly in anticipation of a taxpayer rescue. But libertarian apologists fall wildly short of providing any convincing explanation for what went wrong.

Needless to say, this is the last time in the piece that the subjects of Fannie Mae, Freddie Mac, and moral hazard are so much as mentioned. Why? Because Weisberg, despite his world-weary, just-the-facts shtick ("as with any failure, inquest is central to improvement"), has a political need to pin the whole blame for the would-be Great Depression 2.0 on "libertarian ideas." And nothing says "unlibertarian ideas" more than Washington bailouts and the mother of all subprime lenders.

Other subjects absent from Weisberg's self-described "forensic work": The Sarbanes-Oxley Act (which, you know, regulated financial markets, and had some impact on current events), and the thesis-harshing fact that the Bush administration has increased regulatory spending by more than 60 percent in real terms.

Weisberg continues:

Utopians of the right, libertarians are just as convinced [as Marxists were after the fall of communism] that their ideas have yet to be tried, and that they would work beautifully if we could only just have a do-over of human history. Like all true ideologues, they find a way to interpret mounting evidence of error as proof that they were right all along. […]

The best thing you can say about libertarians is that because their views derive from abstract theory, they tend to be highly principled and rigorous in their logic. Those outside of government at places like the Cato Institute and Reason magazine are just as consistent in their opposition to government bailouts as to the kind of regulation that might have prevented one from being necessary. "Let failed banks fail" is the purist line. This approach would deliver a wonderful lesson in personal responsibility, creating thousands of new jobs in the soup-kitchen and food-pantry industries.

The worst thing you can say about libertarians is that they are intellectually immature, frozen in the worldview many of them absorbed from reading Ayn Rand novels in high school.

There is no space in Weisberg's conception of "libertarians" for people like, for instance, me: Not remotely a utopian, not "of the right," never read an Ayn Rand novel, spent high school playing sports instead of reading political philosophy, don't want to do history over (except for Game 5 of the 1986 ALCS), and don't pine for some presumably awful world where everyone shares my political views. (And, I might add, unlike Weisberg, I don't want to convert my political views into increased state power over fellow citizens who don't happen to agree with me.)

No, I just think that, all things being equal, capitalism is vastly superior to socialism, government is by definition inefficient, and would be much better off focused on essential tasks, rather than, say, nationalizing hundred-billion-dollar chunks of the mortgage industry, or trying to guarantee that asset prices never depreciate. In my world, at least, not all regulation is automatically evil, just ripe for being gamed by the very interests being regulated, and so better when pruned back.

In fact, reason has consistently called for more, not less, regulation of Fannie Mae and Freddie Mac. It certainly wasn't Slate who in February 2004 was sounding the warning gong against the "often unmonitored use" of derivative financial instruments "by government sponsored agencies." A snippet from that Gene Callahan and Greg Kaza article in reason:

While there has been increased legal and social pressure on private corporations to be transparent in their use of derivatives, politicians have shown little interest in similar standards for government derivatives trading.

Some of the biggest users of derivatives are government-sponsored enterprises (GSEs) such as the mortgage-lending institutions Fannie Mae, Ginnie Mae, and Freddie Mac. Doug Noland of PrudentBear.com, a site that advises investors from a bearish perspective, notes, "We have Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system with total holdings [of derivatives] approaching $2.2 trillion and guarantees for another $1.5 trillion of securities."

This year, FM Watch, a coalition of financial service and housing-related organizations dedicated to monitoring GSEs, reported: "One of the GSEs was able to make its RBC [risk-based capital] virtually disappear through use of derivatives and other risk-hedging devices." FM Watch recommends that GSEs' "disclosures should be at least as complete as those provided by other publicly-traded companies and issuers."

The lack of transparency in governmental derivatives trading has resulted in the loss of billions of tax dollars in a string of mishaps spanning a decade.

As reason columnist Veronique de Rugy and Philippe Lacoude recently put it,

[A] critical mistake was made by allowing financial institutions such as Freddie Mac, Fannie Mae, and investment banks to hold significantly smaller capital ratios than commercial banks, while implicitly guaranteeing certain banks' losses.

Weisberg's beef with libertarians stretches back from even before the speculative capital-fueled Internet boom helped create his current job (along with the charity of a man whose wealth Weisberg finds downright immoral). No doubt he, like Thomas Frank and everyone named Naomi (not to mention their ideological cousins on the neoconservative side of the aisle), wants to use a second blip in a quarter century of consistent growth and worldwide poverty-reduction as an excuse to pretend that capitalism is fundamentally flawed, or that libertarians ever had anything to do with George W. Bush.

Is this the New Regime getting ready to round up the first ideological suspects against the wall? I'd suggest something far more comical. There's something almost poignant about the bland Process Liberal center-left, with a financial crisis in its quiver and a super-majority wind at its back, still feeling wobbly enough to attack a set of ideas that are marginal at best to the two-party debate. Why, it's almost as if Weisberg's not confident that Americans will join him in Defending Government!