Populist Caution

Self-professed libertarian Richard Epstein asks, "How did we get to that sorry state where great institutions topple, and what should be done?" in Forbes:

On both questions, our bipartisan consensus is holding true to form. In a system that is chock-full of heavy regulation, they instantly blame the current collapse on the excesses of the free market, for which a still heavier dose of regulation supplies some supposed cure. That indictment contains few particulars. It typically rests on a populist broadside whose centerpiece is greed on Wall Street, but never on Main Street--where there are more voters.

This prior is all wrong. Greed is a constant of human nature. Financial meltdowns are not a constant of economic political life. It takes, therefore, an understanding of the overall incentive structure to explain why selfish economic behavior produces great progress on some occasions and financial ruination on others.

On this question, your stalwart libertarian is persona non grata in respectable company. If voluntary markets normally align private incentives with social welfare, then always look first for a government intervention that knocks those incentives off line. It’s not hard to find some culprits.

One bad move has government legislators and courts intervening to slow down mortgage foreclosures because it is socially unacceptable for people to lose their homes. Unpleasant yes, but unacceptable no. Start with this assumption: Individual tenants can be evicted at the termination of their lease. Only the ardent defenders of rent control (which has ruined New York City real estate markets) find this outcome is unacceptable. Everyone else rolls with the punches.

So what is the difference between the evicted tenant and the foreclosed owner? Only this: The owner has put a down payment on the house. But so what? Foreclosed homeowners typically made only small down payments, or even none at all. Treat their mortgage payments as lease payments, and bump up their amount a bit by dividing the down payment over the number of months before foreclosure. Not much of a financial difference between the tenant and the owner.

Yet once regulators slow down foreclosures, other potential homeowners are denied opportunities to purchase housing they can afford. The housing stock cannot recirculate. Banks that acquired this mortgage paper see their portfolios nosedive. That dicey paper, as William Isaac noted in last week’s Wall Street Journal, drives the entire economy over the edge by strict government regulations that require all financial institutions to "mark-to-market" the various instruments in their portfolio.

I've said some of this--though Epstein recommends further deregulation, implying he opposes any bailout.

My views on bailout here. Which means John Hawkins could expel me from the church of fiscal conservatism and the Archbishops of Canterbury and York may brand me an idolater:

The Archbishop of York, Dr John Sentamu, condemned the financial traders who made millions by driving down the share price of leading banks as "bank robbers and asset strippers". . .

Meanwhile the Archbishop of Canterbury, Dr Rowan Williams, warned in a magazine article that modern devotion to the free market is a form of idolatry and that Karl Marx was right in his analysis of the power of "unbridled capitalism."

In an article for The Spectator magazine this week, Dr Williams - a self-confessed "hairy lefty" - urges governments to do more to regulate markets.

In fact, though the Spectator piece nominally eschewed extremes -- "The question is not how to choose between total control and total deregulation" -- the Archbishop of Canterbury sees financial spreadsheets as graven images:

Behind all this, though, is the deeper moral issue. We find ourselves talking about capital or the market almost as if they were individuals, with purposes and strategies, making choices, deliberating reasonably about how to achieve aims. We lose sight of the fact that they are things that we make. They are sets of practices, habits, agreements which have arisen through a mixture of choice and chance. Once we get used to speaking about any of them as if they had a life independent of actual human practices and relations, we fall into any number of destructive errors. We expect an abstraction called ‘the market’ to produce the common good or to regulate its potential excesses by a sort of natural innate prudence, like a physical organism or ecosystem. We appeal to ‘business’ to acquire public responsibility and moral vision. And so we lose sight of the fact that the market is not like a huge individual consciousness, that business is a practice carried on by persons who have to make decisions about priorities — not a machine governed by inexorable laws.

And this is part of the same mindset that turns the specific, goal-related transactions of borrowing and lending into a process producing pseudo-things, paper assets — but pseudo-things that (when matters do not go well) cause real and crippling damage to actual persons and institutions. The biggest challenge in the present crisis is whether we can recover some sense of the connection between money and material reality — the production of specific things, the achievement of recognisably human goals that have something to do with a shared sense of what is good for the human community in the widest sense.

Of course business is not philanthropy, securing profit is a legitimate (if not a morally supreme) motivation for people, and the definition of what’s good for the human community can be pretty widely drawn. It’s true as well that, in some circumstances, loosening up a financial regime to allow for entrepreneurs and innovators to create wealth is necessary to draw whole populations out of poverty. But it is a sort of fundamentalism to say that this alone will secure stable and just outcomes everywhere.

Fundamentalism is a religious word, not inappropriate to the nature of the problem. Marx long ago observed the way in which unbridled capitalism became a kind of mythology, ascribing reality, power and agency to things that had no life in themselves; he was right about that, if about little else. And ascribing independent reality to what you have in fact made yourself is a perfect definition of what the Jewish and Christian Scriptures call idolatry.

And read Dan Henniger in the WSJ:

Once we're done imposing Spartan discipline on the dining rooms of Wall Street, how about some of the same for the halls and classrooms of the average inner-city high school? A nation in panic at the sight of banks imploding has yawned for years while the public-school system melted down.

BTW, is this where lending went off the rails? Or maybe here?

(via Englishman's Castle, reader OBH)