[Image courtesy of Toothpaste for Dinner via tbogg.]
I used to spend a lot of time arguing with libertarians, back in the prehistory of the Internet, when that was the primary form of mental infestation found there. It helped me refine my own views a bit, but was mostly a waste of time, and aside from occasional sniping I don't do it any more.
On reading that Alan Greenspan has started muttering favorably about bank nationalization, which is akin to Genghis Khan becoming a pacifist or the Pope opening an abortion clinic, I realize that I have won. Libertarianism is dead, over, finished, kaput. Although if experience is any judge, its devotees won't realize it and will keep on churning out the same brain-dead arguments over and over, which will be even more disconnected from reality than before. In fact, the stronger the role of the state in the economy, the more they will have to complain about, and the more they can pile the blame for every evil in existence on its ample back. So maybe it's good times for them.
However, their role in the last couple of decades of being the useful idiots of the Republican Party will be over (as will, one hopes, the Republican Party). The governing style of Republicans from Reagan through Bush II was to spout small-government rhetoric while massively building up the state apparatus, and to preach fiscal responsibility while racking up massive deficits. Republicans who campaign on a small-government platform deserve to be laughed off the stage, and for at least the next couple of election cycles, might actually get what they deserve for a change.
3 comments:
Congrats on your victory. But now that you've won, and libertarianism has been vanquished, I think it'll be safe for you to say the word "libertarian" without subsequently calling libertarians morons. No longer seems necessary.
You are right. Libertarians are not, in my experience, actual morons. They tend to be relatively smart people (often in technical fields) who just have adopted a fairly dumb political philosophy, based on the stated or unstated supposition that the rules of society should be as simple as the rules of physics. I wouldn't waste my time arguing with actual morons; libertarians annoy me because they are smart enought to know better.
To suppose that free markets - along with the ideology of their defenders - are dead because of the financial collapse is to make a conclusion unwarranted by the circumstances.
The financial industry was never and is not today a free market. On the contrary, it has been shaped by its regulatory environment for almost a century, since the Federal Reserve system was formed in 1913. To call the present collapse a 'market failure' in the Keynesian sense is to ignore the great extent to which it is the product of perverse regulatory incentives.
Let us also bear in mind that, while real deregulation occurred (for example) in the truck freight and airline industries, with great and undisputed benefit to their customers, what has passed for 'deregulation' in the financial sector has largely been selective relief from regulation for favored constituencies within it. I'll give an example directly.
Bank 'nationalizations' occur all the time. That is essentially what the FDIC does when it takes over a failed bank. There were 25 such occasions in 2008. When FDIC takes over a failed bank it begins by assuring the availability of funds to depositors. It sorts through the failed bank's assets (loans and investments) and tries to sell them to sound banks. Inevitably some of these assets will prove unsalable. Eventually all of the deposits and all of the assets that can be sold are placed with other banks, and the unsalable assets are either worked out with the borrowers or written off. The process may take anything from weeks to years.
To provide some idea of the dimensions and origins of the current situation, consider that the aggregate fourth quarter 2008 losses of all 8300-odd banks under FDIC supervision totalled $26.2 billion. Of course, some of those banks (including mine) were profitable in the last 3 months of 2008; the $26.2 billion is a net figure for the whole system. Compare this with the fourth-quarter 2008 loss booked by the government-sponsored Fannie Mae, which all by itself was $25.2 billion. I hope this gives you a notion of how enormous Fannie Mae is.
FDIC losses incurred in the settlement of bank failures are defrayed by a fund made up of premiums paid by FDIC-insured banks. As a consequence of other banks' losses, we have seen our FDIC premiums for 2009 more than double from 2008 rates. The same is true at all other sound and surviving banks. On the other hand, the taxpayers of the United States are directly on the hook for Fannie Mae's losses.
The role of the GSEs, Fannie and Freddie, in the current meltdown cannot be overstated. They created the secondary mortgage market, where the trouble started. They dominated that market, holding or guaranteeing over 50% of all residential real estate mortgages in the country.
If you do not believe in the market-dominant position the GSEs held and still hold, I suggest you look in the 'consumer rates' section of any day's edition of the Wall Street Journal. It's on page C4 of today's issue. There you will find average rates quoted for 30 year and 15-year fixed rate and 5-year adjustable rate mortgages, and then you will find one for "jumbo mortgages, $417,000-plus." It is typically at least 150 basis points above the other rates.
Why this disparity? and why is there a floor at the odd amount of $417,000? This is an illustration of the influence that Fannie and Freddie, despite their current troubled condition, continue to exert. $417,000 is the maximum "conforming loan" that Fannie and Freddie will buy on the secondary mortgage market. Mortgages under that amount enjoy a subsidy because of the GSEs to the extent of the interest-rate differential - and the U.S. taxpayer is footing the bill.
Fan and Fred set the prices that private lenders have to meet or beat. Those that didn't play the game - mostly community banks that stuck to conserrvative underwriting standards - had to settle for lower returns. My bank's return on assets was, as a consequence, historically 10 to 25 basis points less than that of many of its peers. Today, it doesn't look so bad compared to them, because we have remained profitable whereas many of them did not. Our good results were possible because being privately held insulated us from the myopic focus on quarterly results and share prices characteristic of publicly-traded companies. Those that had to focus on those things, trying to meet or beat the politically-driven lending practices of Fannie and Freddie, are now in distress.
I said earlier that I'd give an example of how deregulation in the financial sector amounted to selective regulatory relief for favored constituencies. Obviously, the comparatively lenient regulatory treatment of the GSEs, and their private-sector feeders such as Countrywide Financial, which did not accept deposits from the public, was one. However, the real problem that leads to Greenspan's and others' (e.g., Lindsey Graham's) remarks about bank nationalization is that the country's ten largest banks now hold well over 50% of all bank deposits. This situation was made possible by a bank deregulation act passed by a Democratic congress during the first two years of the Clinton administration, and signed by President Clinton, which permitted interstate branch banking.
Before this act the only way (with a very few exceptions) that a banking company could do business in more than one state was as a multi-bank holding company operating separately chartered, separately capitalized banks in each state, or (in some states) at each location. This had the virtue of distributing risk and localizing loss. All this was swept away by the regulatory change, which had a great deal to do with the creation of banks that were 'too big to fail.'
The reason for the current talk about bank nationalization arises because the resources of the FDIC are not sufficient, even with the huge premium increases of 2009, to deal with the failures of institutions like Citi. I'm afraid that what the kind of nationalization proposed will lead to is not an ordinary, FDIC-style winding-up of the business of these banks, but rather their politicized use as makers of grants and subsidies, disguised as loans.
An example of what is in store for them is the pressure that reportedly has already been exerted on the recipients of so-called bank 'bailout' monies to provide loans to support General Motors. Of course, this would be sending good money after bad, but no one in government seems to be aware that loans ought only to be made to borrowers who are likely to pay them back. Those in government exerting such pressure appear to be oblivious to the fact that money lent by banks really belongs to their depositors, and a bank that knowingly makes a bad loan is putting its depositors at risk.
The lessons that ought to be drawn from recent experience are:
1) Bank regulation is necessary and has its place. It should have as its sole purpose the protection of depositors' funds. To that end it must assure adequate capitalization and attention to the quality of assets;
2) Giving political incentive to the making of loans to borrowers that have doubtful capacity for repayment (as encouraged by Fannie and Freddie) is contrary to lesson no. 1, and should be strictly avoided;
3) Any bank that is 'too big to fail' is just simply too big. Any rescue of such institutions needs to have the ultimate objective of re-privatizing them not as one bank that is still too big to fail, but as a number of smaller and more manageable banks, the future failure of any one of which will not be catastrophic to the FDIC. Banking does not need more consolidation, it needs more diversification.
I'd conclude that if you are going to write about the financial industry, you would really do well to learn how and why it is structured as it is, and how it actually works.
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