Have any noted "free market, deregulation" advocates changed their tune?

Great Debates
61

Again, I do not think there is anyone who is against all regulation, I am certainly not, but the OP mixes the concept of regulation with freedom of the market and then bashes everything together.

I am totally for the concept of free competition but I am also in favor of regulation. Now, regulation can be good, bad or neutral. MORE regulation is not necessarily a good thing and neither is less regulation. What you want is good regulation.

Clearly the regulation of the banking industry in this case has proven to be bad and/or insufficient, no question about it. But I am not about to throw the baby out with the bathwater and declare free competition a bad system because it is not. It is the best system yet devised.

Clearly the regulation of the banking sector was insufficient. In Spain it is regulated much tighter and there is more oversight and it seems the Spanish banking sector has fared quite well in all this mess. Banks in Spain are closely supervised in their reserves and investments and have to contribute to a common fund set up to cover the event of any bank not being able to meet its obligations.

So, yes, good regulation is good, by definition. But just having MORE regulation can have negative effects. So it is a matter of discussing case by case taking into account the circumstances of the moment. All that is fine. But it does in no way disqualify the system of free competition as the best system for allocating resources and produce the best results. The OP was (by ignorance or with premeditation) trying to equivocate. I want to keep the baby.

62

I really can’t figure out why this is all being blamed on the free market.

First of all, the financial markets are not ‘free’. They are heavily regulated. Central bankers control money supplies. Government agencies guarantee deposits. Government incentives distort decision-making. Laws like Sarbanes-Oxley impose huge requirements on corporations in terms of their financial accounting. In fact, one of the Sarbanes-Oxley rules, the ‘mark to market’ regulation, may be partly responsible for the meltdown - it requires businesses to report assets based on the value they’d have today, rather than the estimated value at time of sale at some point in the future. The result was that when asset values crashed, companies also looked immediately shaky.

Couldn’t we just as easily say that this is a failure of regulation? That the financial system has become too complex for governments to effectively regulate?

Couldn’t we just as easily say that the true failure is that financial people were encouraged to take big risks, safe in the knowledge that ultimately what they were doing would be bailed out by government?

And couldn’t we say that the failure here is that the implicit guarantee of many of these financial instruments caused the actors in the market to ignore the risks in them?

It seems to me that all are true - that what we’ve got here is a failure of the marriage of government and markets - of having a market which is heavily regulated in some areas, unregulated in others, and in which governments stand ready to cover the risk implicit in the unregulated transactions.

Fannie Mae and Freddie Mac managed to move the kind of funds they moved because their implicit backing by the government allowed them to borrow money at treasury rates, and allowed them to sell risky investments because the buyers made the assumption that a government-backed agency wouldn’t screw them over.

To me, this doesn’t look like a failure of markets, or a failure of government. It looks to me like a learning opportunity. Governments over-reached, assuming they could control the financial markets more than they really can. The financial markets over-reached, assuming that the house of cards would continue forever. Modern computer systems and information networks allowed money to move so quickly an opaquely that no one could keep track of all that was going on.

I hope what comes out of this is a new commitment to better regulation, not more regulation. And God help us if the conclusion that comes out of this is that governments have to run it all, or we’re screwed.

There was a market failure here - a failure due to lack of transparency and information asymmetry. What we need is a financial system in which there are regulations which require investment risk to be transparent. We need to break apart these financial instruments and prevent them from becoming so complex that no one can determine exactly what kinds of assets are backing them. We need new regulations to ensure this. No doubt about it.

But on the other side, we need to get governments out of the business of guaranteeing home mortgages and purchasing debt. Fannie Mae and Freddy Mac should be completely disconnected from government, as some of the other GSE’s were (and which are doing fine). Congress should never be in a position to micro-manage the mortgage market and decide who banks should lend to. Because they were clearly part of the problem here.

And while I’m not a gold bug, and I think a gold standard is crazy in the modern era, we might need to look at more concrete ways to tie our wealth to real assets, or at least make leverage ratios completely transparent, and regulated if need be.

We also need to have a very, very clear understanding of just what the government will and won’t bail out. Business actors need to know that they WILL be left starving if they take big risks and lose. This business of being ‘too big to fail’ is destabilizing as hell, and has the perverse effect of making the largest institutions, the ones who could hurt us the most, the ones willing to take the craziest risks.

We need smarter regulation, more humility on the side of both the financial wizards AND government, and more transparency.

What we don’t need is a completely socialized financial system. That would take the current problem, make it far worse, and institutionalize it.

63

It does not have to be criminal. If you are in control over those who make the laws and regulations, you do not have to be criminal. Just make the laws suit your greedy needs.
Anybody who believes markets do not need regulation and capitalism is self correcting, will not cede to logic. They are lost and will never get it.

64

One might say those things, but I don’t think one can just as easily say those things, as has been covered previously (if not in this thread, in others).

Now that’s a very concise summary that I’d say is spot on. Not that my voice carries any great weight.

Oh, fer fuck’s sake. And you were doing so well at being mostly even-handed. You just can’t resist the socialism [bogey | straw] man, can you?

65

Oh, sorry. I wasn’t aware that advocating a complete government takeover of the financial markets is considered to be ‘even handed’.

Or did I miss your point?

66

Evidently, you did. Unless I overlooked it, no one here is advocating for a “completely socialized financial system”. Hence, the strawman. In fact, until you brought it up, I can’t recall anyone here advocating for anything close to socialism. Hence, the bogeyman. Other than that, I think your post was mostly even-handed.

It’s not clear to me why you felt it necessary to end your post that way, unless you simply can’t resist.

67

Oh. Perhaps they’re not doing it in this thread, but I’ve heard lots of this talk, and there are people running around saying that this crisis has exposed free markets for the failure that they are, and that a new era of socialism is upon us. If no one’s saying that in this thread, great. But plenty of people are.

68

Who?

69

This is true, but only as long as we’re using the common definition of “rational”. It’s worth bearing in mind, though, that “rational” within economics is normally a mathematical abstraction, not an assertion of anyone’s ability to make sound decisions. Most people are, indeed, rational in the obscure mathematical sense. This is not at all contrary to them also being a bunch of irrational fools.

The problem, of course, is when some half-educated goon comes up and says “Economics says people are rational! That means they NEVER need the government!” That is the worst sort of equivocation.

70

Ah, but consider the endowment effect. It is not irrational in the common sense to be impacted by this, but it does violate common assumptions on how things are valued in the market. Alas, this entire mess shows that many of the players in this economy acted irrationally if viewed in the large, though many of their actions are rational in the small. I’ve been looking at the 2005 edition of Samuelson to try to figure out the concepts my daughter has been throwing out, and they saw the need to include a sidebar on behavioral economics in the marginal utility section.

71

I think Bush and Paulson nationalizing the banks has a lot to do with this. Who’d have thunk that the free marketers would arrange for massive government ownership of the financial sector. I salute you, Comrades Bush and Paulson. :smiley:

72

From my understanding of things, there are nevertheless some work-arounds that preserve the mathematical assumption of “rationality” (which is just the transitivity and completeness of preferences) despite these problems.

This might sound like a meaningless nitpick, but the equivocation can actually go both ways. I’ve heard people decry all of economics because of the assumption of “rationality”, when it was clear they had no understanding of how the word was being used in context. They simply didn’t have the basic foundation of knowledge, which rendered their opinions meaningless. You’re obviously not in that category, but I felt that it was worth noting the semantic slipperiness for the sake of people who haven’t had the same background.

73

**Spartydog ** should probably have used a term like “predatory” instead. A sufficiently powerful predator can rewrite the laws to make his or her predation legal; but it’s still predation.

74

I think they could be said even more easily.

But before I try that, I’ll get up-to-speed on the other threads to which you refer, Digital Stimulus. Do you have a link, or could you give me a hint as to where they are?

75

Ah. I think you should stop reading such dreck. Although I can certainly understand some small amount of “socialism” talk, what with the government currently buying equity in private companies.

But a “completely socialized financial system”? That’s just insane.

76

Ever hear of the liberal paradox?

77

Some people just have those old reflexes which kick in and they can’t help it. They exist on both sides of the aisle:

For some it’s “you have to choose between free market and communism” and for others it’s “You have to choose between free market (which is bad and leads to all sorts of bad things) and [something which I will not call socialism because it is a tainted word but which is in fact socialism and which is good for you if you just knew]”.

Both sides conflate all sorts of things in the efforts to further their cause.

78

I think the problem is that radical free marketers. who don’t have the background knowledge, hear “rational” and don’t use the mathematical definition. They don’t get how people can act in ways not in their best interests. You don’t have to be stupid or ignorant to make this mistake, see Greenspan’s astonishment that traders were greedy and did behave as he expected.

I’d guess that models taking these things into account would be a lot more complex. I’m not sure there is a lot of interaction between these two schools at the moment. I know some of the behavioral people at Chicago are proud of how little math they use - yes, even at Chicago.

79

Interesting. Not quite what I was discussing, which implies that sometimes people will not choose the Pareto-optimal choice even without constraints. It seems to me that “liberal” here is in the traditional sense, since modern liberalism often involves constrained choices.

80

They’re sprinkled around…I know you’ve participated in some. But rather than that, I’ll give my reasoning. First, let me point out that Sam does not maintain the distinction between “freedom” and “regulation” that others have insisted upon as being orthoganal (at least, in many cases). This makes a trememdous difference in keeping ideas straight.

Taking the second question first, here, for instance, is one place where the distinction between “free” and “regulated” matters. I doubt anyone worth having a conversation with would claim that governments can effectively regulate the financial system to the extent he implies (the implication drawn from his closing statement about a “completely socialized financial system”). So that’s a crap question that’s hyperbole, at best, and one that we cannot “just as easily say”.

As far as “failure of regulation” goes, I certainly accept the items listed as contributing factors. But to claim these things are more responsible than, for instance, the loosening of capital/investment ratios, predatory lending, poor valuation of securities, and the genesis of completely new and unknown types of financial instruments is folly. And yet, by omitting any mention of the items I just listed, it seems to me that Sam is attempting to misattribute the bulk of blame. If that is so, we cannot “just as easily say” these things bear substantial load for the crisis, particularly when other factors are not mentioned at all.

Conversely, if “regulation” is taken to be that type that does not impinge on market freedom (e.g., the need for regulation concerning transparency that Sam proposes near the end of his missive), then this is also reduced to a crap question, and one that isn’t worth asking in the first place.

It’s true that financial people were encouraged to take big risks…similar to borrowers that took out loans they could not afford (I’m pretty sure Sam has chastised exactly that, although I could be mixing up posters; let’s call it a position that he might adopt, with an acceptance that it’s a fairly common refrain that wouldn’t be out of line with his position).

Face facts here: this is exactly what “financial people” get paid for. At least a mortgage borrower legitimately has some claim to ignorance, in that many/most are not familiar with the verbiage or are just out of their depth. That’s not really an excuse; but certainly more of one than can be given to these aforementioned “financial people”, who do not get a pass for being so weak/greedy as to not resist such encouragement.

Furthermore, it’s not only their job, but I think it’s safe to say that these “financial people” can be considered experts in their field. If they are not, then the “true failure” has little to do with the government; the “true failure” is hiring unqualified idiots to do a job. Again, one could say what Sam has with some grain of truth; one cannot “just as easily” say it.

See the previous points.

For clarity’s sake, I’d point out that I was serious when I said that I found Sam’s post to be mostly even-handed. I’ll even say that I agree with much of it. But to reiterate specifically about the above: yes, one could say those things. I’ll add what I didn’t say explicitly before: if one does say those things, there are some nuggets of truth to them. But, IMHO, they are mere nuggets in a gold rush, and I stand by my assertion that one cannot “just as easily” say them.