The Raleigh News & Observer asks rhetorically "What’s the Plan?" Then proceeds to list a slew of messes caused by government planning:
Inflation is up, the Dow is down. Fannie Mae and Freddie Mac, the
federally chartered companies that hold or guarantee about half the
mortgages in this country, have lost 80 percent of their value and now
are being offered taxpayer money for a bailout — but that money’s
limited by a struggling economy and the drain of the war in Iraq.
Then, as if the authors had forgotten what they had just written (and oblivious to the irony), proceed to critique the Bush Administration for a free-market "let-the-chips-fall" attitude to the economy! (This is, of course, a caricature of the Administration, which, sadly, cannot properly be made.)
I must take a moment to point this out, because – like so many others in economic history – the News & Observer labors under the misunderstanding that complex economies can be planned and that planning failures can be fixed by bureaucrats with special knowledge. Call it the "Intelligent Design" fallacy, which has been thoroughly exposed and discredited by a number of luminaries and economic titans.
I hope the average reader is able to read between lines like:
But the White House and Congress, despite flurries of activity that
seem driven by desperation, have been generally slow to respond. The
"trickle down" of a bad economy feels this time like a waterfall.
A waterfall? Is the N&O seriously arguing with this shabby mixed metaphor that the economy is worse now than when Reagan took over from Carter? Or is this wobbly Wortspiel an attempt to discredit one of the most successful economic reform eras in U.S. history?
It’s ill-advised rapid responses by government (responses to dumb planning that creates unintended consequences – whether bailouts, tax increases or fed infusions) that keep the business cycles booming and busting. Cheap shots like the above quote at supply-side economics are yet another example of journalists playing economists in the papers. It’s this kind of unreflective pap that gets produced when reporters get their regular assignments done and the editor give them a crack at weighing in on something weighty. But it’s rather like letting a filing clerk at the doctors’ office play diagnostician for a day. I sure wouldn’t want to be the patient.
-Max Borders
The problems in the mortgage market are anything but a result of planning, and you know that quite well. They are more a result of a complete lack of oversight by the Fed, encouragement of ridiculous debt structures by regulatory agencies who decided to stop regulating, and overconfidence in the future value of real estate by investors, regulators, borrowers and lenders alike.
The answer to such a predicament is certainly not to unplug the machine and let it grind to a halt.
Ad hoc government makes mistakes. That is why you want ad hoc government – because a government that makes mistakes is one which you can criticize. A well-functioning government which helps its citizens by providing the playing field and the rules of play is something that would frustrate the heck out of anti-government radicals like Red Clay.
I don’t think you understand either government or rules of play, Dr. The rule of law, and government as a steward of it, means that the law doesn’t privilege individuals or groups. You would do well to read the intellectuals I cited in the post, as well as folks like Douglass North, before dropping such an inane mischaracterization of my position–which is about about proper RULES of the GAME. Here’s a primer:
http://www.mercatus.org/Publications/pubID.2209/pub_detail.asp
You would also do well to look beyond this hackneyed old government-as-universal-fixer-upper trope to the litany of government failures created by people who think just like you (i.e. inside the bureaucracy).
PS: See Part I of the above for a discussion of the proper role of institutions.
drfrank goes oh-for-three in his analysis:
“The problems in the mortgage market are anything but a result of planning, and you know that quite well. They are more a result of:
1) a complete lack of oversight by the Fed,”
— actually, the Fed’s easy credit policy helped create the housing bubble. Besides, what “oversight” was “lacking?” Read the entire selection of Federal and state statutes regulating the mortgage industry and still try to claim what was needed was just one more page of regulations.
2) encouragement of ridiculous debt structures by regulatory agencies who decided to stop regulating,”
— you get this half right. The Basel Capital Accord (an international standard imposed on large banks) encouraged the “ridiculous debt structures” by essentially rewarding the holding of risky mortgage bundles. It was, in fact, their regulations that encouraged the debt structures, not that anyone decided to stop regulating
3) and overconfidence in the future value of real estate by investors, regulators, borrowers and lenders alike.”
— sorry, this excuse doesn’t wash. There is no possible market phenomena that can explain such a universal failure to properly evaluate risk in the mortgage market. That’s how they make their money, they’ve been doing it for decades. Something externally was at play to distort their decision making.
It was, in fact, your beloved planners that encouraged, and at times forced, the mortgage industry to undertake their risky behavior. Check out the HUD’s National Homeownership Strategy of “reducing barriers” to homeownership. It will read like a “how to” manual for creating subprime, low doc and no doc loans. HUD then forced the mortgage industry to increase the use of subprime loans in order to overcome the “inequities” of homeownership and serve previously “underserved” communities. Note further HUD’s increasing “affordable housing goals” that require Freddie and Fannie to purchase a given percentage of their mortgages be from low income and “geographically targeted underserved areas.” That basically equated to a pay to play directive on mortgage companies – in order to sell to Fannie or Freddie they would have to engage in subprime lending to a given extent or else they wouldn’t do business.
This whole mess was actually the result of the mortgage industry responding to government incentives and regulation – not the absence of it. In other words, government planners tried to mold homeownership to be “equitable” and in so doing, caused some devastating unintended consequences.
I will throw onto this excellent comment, Brian, that Fannie and Freddie privatize returns but socialize risk — which is government’s recipe for bad decisions in this market. Again, the gov’t, not the market is at fault.
Brian b reads enough to get in trouble. Max appears not to read, or understand, at all.
Government did not create mortgage backed securities or CDOs. Did it allow them? Yes. But it did not create them. Nor did it force mortgage bond insurers to insure the bonds as AAA in the face of overwhelming evidence that they were not of such quality.
Assumption – property values will continue to increase as they had over the last 15 years.
Action – encourage debt to equity ratios that approached the ridiculous.
Result, in a declining housing market – loans that cannot be repaid, all crashing down on the rube goldbergian risk spreading structure.
Ultimate result – lawyers get rich, and free market absolutists, faced with the natural result of a hideous creature of the market, go back to what got them here, and do their best impression of pre-Copernican astronomers, recalculating all their tracks of the orbs and spheres to account for an unexpected result. It wasn;t the market, you see, we did not allow “market” to be “the market” and we interfered blah blah blah blah blah.
Meanwhile, the mortgage brokers, the promises of whom formed the rickety basis for the entire structure, are gone, belly up. And you and I are holding the bag.
A little more regulation might have been a good thing five years ago. Unfortunately, we all thought the merry go round would never stop.
And Max, when trying to attract readers to a blog, you might want to avoid being a complete a-hole to a reader who comments. brian’s comment was much more appropriate and effective than your condescending and insulting “read the intellectuals” statement. Pompous much?
Sorry Dr. Frank, but “anti-government radicals like Red Clay” doesn’t get you a respectful response. Neither does “a-hole.” Try a mirror.
You might try the intellectuals, too. I don’t have time to explain in a blog post why government planners cannot possibly know enough to manage a complex system. Hence, I divert you to the authorities in (vain?) hopes that you’ll read them.
By the way, the assumption that property values would continue to increase was caused by a) subsidization of housing (gov’t), b) the availability of artificially cheap credit (gov’t) — all of which lead to a bubble that is currently being punished, rather sternly by the market. It would not be so stern a punisher if the gov’t didn’t, hadn’t and wouldn’t intercede to mess with the fundamentals. I guess your view is that people shouldn’t bear risk. But my view is that government contributes to excessive risk, but risk cannot be legislated away.
And that Rube Goldbergian risk structure of which you speak? Gov’t. You have Freddie, Fannie and FHA to thank.
Your ignorance of the actual structure of mortgage-backed securities is mind-boggling.
How do I get a rich guy to prop me up and let me pontificate for a living?
Sorry, can’t keep arguing with you this morning. Coffee break is over, and I have to go do some actual work.
Once again, drfrank hits the nail right on the thumb:
“Government did not create mortgage backed securities or CDOs. Did it allow them? Yes. But it did not create them.”
Mortgage backed securities per se are not the problem. Once again, we need to see the incentive structure created by government that forced mortgage companies to include subprime mortgages in their bundles of MBS’s. I refer you again to the HUD requirements.
“Nor did it force mortgage bond insurers to insure the bonds as AAA in the face of overwhelming evidence that they were not of such quality.”
The ratings agencies are “government chartered corporations” thanks to SEC regulations in the 1970s that deemed their information to be a “public good.” Good old regulation changed the business model of these agencies so that the ratings agencies no longer assumed economic risk if they were too generous with their rating. No doubt Freddie and Fannie pressured the ratings agencies to provide AAA ratings to risky mortgage bundles so that they could meet the government requirements that a certain share of mortgages they purchase are from low income, high-risk loans.
“Assumption – property values will continue to increase as they had over the last 15 years.”
Once again, this oversimplified statement doesn’t wash. The mortgage industry has seen extended periods of property value growth in the past and were able to continue a sustainable pattern of risk evaluation. What was different this time? Government meddling and establishment of goals and perverse incentives to rathcet up the number of risky loans to “underserved” customers.
Government goals, monetary policy and regulations are what caused the distortions in the marketplace. More regulation would merely cause more unintended consequences.
Blaming the situation on short-sighted greed in an “unregulated” market is an easy script to read. Think critically about the subject and analyze the government’s role in changing the incentive structure, not to mention the rules of the game, before you rush to your intellectually lazy conclusions.
Max’s defense of supply side economics is a link to Wiki and to a 1996 Cato paper?
For an alternative view read this New Yorker article from Oct. 2007 “The great lie of supply-side economics.” It does not, shall we say, support Max’s findings. Once again, facts have a liberal bias.
http://www.newyorker.com/online/2007/10/29/071029on_onlineonly_surowiecki?currentPage=1
Economics from the New Yorker. Okay. Well…
http://www.opinionjournal.com/extra/?id=110006842
http://www.opinionjournal.com/extra/?id=110010844
http://article.nationalreview.com/?q=ZWQ4YzY5MWIxYjBhMjQwOTJkNzA4YzAxYjA3ZTdiMmQ=
http://article.nationalreview.com/?q=MzAwMWJmMjE2M2UwN2YyNjI3NDIyZTI5ZWQyMWY1NGE=
Dr. Turner always manages to dredge up a charletan to support his statist positions, alas. Can the good doctors please go back to asking people to cough? It’s your comparative advantage. Oops. Here you go:
http://www.fee.org/Publications/the-Freeman/article.asp?aid=4962
Max…
Dredge up charlatans?
I wouldn’t think I would have to explain this to the President of Mr. Pope’s audio-visual club (or “media coordinator” if you prefer), but the New Yorker article linked to numerous sources. The primary source for data was the Congressional Budget Office.
By the way, the author (James Surowiecki) was a Morehead Scholar at UNC-CH (class of ’88) before pursuing PhD studies in American History at Yale. He is now an author and financial journalist. I would say he is at least as qualified as you are to comment on economics.
Feeling threatened Max? I would think you would want your readers to be exposed to differing points of view. Why don’t you let your readers decide.
Finally, speaking of dredging up charlatans…why are most of the resources you and the Locke boys cite regarding climate science funded by Exxon?
I’ll start taking my economics advice from a historian when you start taking medical advice from an economist.
That said, I’ve read parts of Surowiecki’s Wisdom of Crowds and there is some good stuff in there — stuff you would probably benefit from learning as a statist who thinks elite politicians should make critical decisions for the rest of us.
The funding-from-Exxon fallacy is so hackneyed and so weak, I don’t know whether to be disappointed at your inability to address the ideas and arguments, or at the fact that you employed the fallacy to begin with. Hurling insults and insinuations has no intellectual content. But then you’ve never given us an abundance of intellectual content. (There are opportunity costs to this non-debate, so goodbye.)
Actually, I was very hasty: Surowiecki is no charlatan, but he’s wrong on supply-side econ.
But let’s not get hung up on supply-side. Let’s talk about economic freedom a la fundamental institutions… i.e. http://www.freetheworld.org and let’s talk about your reading the Wisdom of Crowds and coming back to critique markets v. bureaucrats. I don’t think you can. But if you think you can, then we can have a real debate.