Too much…
Too much of anything is bad, and government regulation is no different. I have been asked time and again why I fear and dislike too much governmental intervention. Though I have written about this issue a lot, an example of a double-jointed pendulum provides a nice visual which provides an analogy to my reservations about nationalization: It is easy to anticipate the path of the pendulum when the joint is locked. However, when the joint is released the movement of the pendulum is totally unpredictable. This is a great visualization of chaos theory – where a small change causes a large amount of uncertainty. In short, the more complexity we add to the financial system, the more the unpredictability and randomness.
The current administration is trying its best to mitigate risk in the markets in order to prevent another financial meltdown of this magnitude from ever occurring again. However, I do not think that throwing money at the problem is a viable solution. The premise of a Capitalist economy is based on the survival of the fittest. However, the current president has been the complete opposite. Bailing out companies without requiring them to change their business plans (the initial auto bailout) or the new cash for clunkers deal (in which case if you bought a gas guzzler you get a $4000 rebate) are a few of the governments policies rewarding those who made poor decisions. I can accept (to an extent) giving people second chances, but punishing those who make good decisions makes no sense to me. Why should a person ‘A’ who has a 1998 Nissan Sentra not be allowed to trade in her car (because it is considered fuel efficient) but person ‘B’ be qualify for the program after buying a 2004 Hummer.
Lets look at the issue from a different perspective. The carrot and stick theory is a simple premise of how a market economy works (rewarded if you do well => Carrot, punished if you do badly => Stick). This theory has been completely violated in the past few months. One cannot reward good work with bonuses or let everyone get a rebate on a car due to government regulation, nor can one fire for inefficiency or incompetence due to Workers Unions. (I am completely in favor of what unions USED to stand for, but I find them a hindrance to business now a days). In short, throwing money at issues, legislating regulation favoring the few and curtailing business and bonuses is not the best way to approach the current situation. I am by no means saying that the bailout was not necessary, but we need to know when to say enough is enough.
It is important to understand that risk management is an evolving science and the current situation is unprecedented, the basic lesson remains the same – the more regulation and complexity that is added to the system, the less likely the risk managers are able to account for risk, making it a lot harder to remedy our current situation.
My brother: how my heart aches to read your words. No bother. We shall dive headfirst into the pool of your thoughts and see if we can’t prevent ourselves from drowning…
You attempt to use a double-jointed pendulum as a visual representation of your hesitation concerning governmental regulation, ostensibly focusing on government interference in the financial sector. But your terminology is all over the place. You begin by speaking of your “dislike of too much governmental intervention.” But then in the next sentence, you speak of your “reservations about nationalization.” While nationalization certainly implies governmental control, we can agree that there are varying levels of governmental regulation and interference in any market.
If your argument primarily concerns your opposition to nationalization of certain markets, sectors on businesses, then I can agree with you in a very non-specific way. You seem to state that, without governmental regulation and interference, financial markets are predictable, much like the single-jointed pendulum, while adding the government into the mixture causes unpredictability, as represented by the double-jointed pendulum.
This seems like little more than a restatement of the completely-debunked laissez-faire, Milton Friedman theories on economics that are responsible for this continuing disaster. Alan Greenspan himself has conceded that stronger governmental regulation of financial markets could have averted the economic crisis we’re now experiencing. The financial and insurance markets have been anything but predictable since Reagan came to power with his hazy theories about free markets and evil government.
In point of fact, financial markets were much more predictable under the New Deal program, which can be said to have lasted until Nixon scrapped Bretton Woods. During this time, America had a robust and financially secure middle-class, a phenomenon that free market capitalism has all but erased from American society. There are now two basic classes of people: the uber-wealthy and the other 95% of us.
Governmental regulation’s goal, its raison d’etre, is too remove unpredictability and volatility from markets, not to increase it. Governmental regulation lays out, in plain English, the rules by which the system must operate. A lack of governmental regulation allows for corporations and their vile executives to make up the rules as they go along, believing, like Milton, that a corporation’s social responsibility begins and ends with profit.
You go on to claim that “[t]he premise of a Capitalist economy is based on survival of the fittest.” But that’s more of a modern American perversion of the capitalist ideal than classical capitalist theory. Capitalism, unlike communism, is not a rigid ideology. Capitalism is, in essence, a matter of degree, as economies and markets do not exist in a bubble. Economics, like politics, is merely a means to an end, and that end is determined more by culture and social goals than by some rampant theory.
Strangely, your example of bailing out companies “without requiring them to change their business plans” begins and ends with the automobile industry. Last time anyone checked, it wasn’t the automobile industry who: a) got us into this mess or b) was the recipient of much government largesse. But how do you fail to mention Goldman Sachs and the rest of the felony brigade? There have been no demands whatsoever made upon them, and they continue their deplorable and undemocratic practice of doling out enormous bonuses regardless of performance.
I believe that your analysis of the CARS program is erroneous on several levels. First of all, because there wasn’t more government interference in the Big 3 and their production models, gas guzzlers, such as the Hummer, were pumped out to the exclusion of more practical cars. These are cars that people wanted and, according to free market anarchists, people should be allowed to purchase what they want. So purchasing gas-guzzlers, while stupid on its face, was celebrated as a “good” for the American market. Thus, I disagree with your assessment that allowing people to trade in cars for more fuel-efficient ones is rewarding bad behavior. Quite the contrary, those morons that purchased those cars were the perfect little capitalist zombies for a free market system.
But on another level, the CARS program wasn’t designed for people with a 2005 Hummer. It was designed for people with a 94 Beretta or an 88 Nova. We won’t know until the figures are released, but I wouldn’t be surprised if very few new Hummers were traded in.
I disagree with your argument regarding carrot and stick analogy. Financial executives have been rewarded for their sheer incompetence, not only through bonuses and stock options, but by merely being allowed to remain at the helm after they trashed the country. The captain of the Exxon Valdez didn’t get a new ship, courtesy of the company. Yet Geithner, Summers and the rest of the corporate whore gang expect us to believe that these people – these greedy, self-interested fucks – are indispensable, that the economy would be in dire straits without them.
If I scored a 670 on the SAT, I doubt many people would be clamoring for me to tutor them on the finer points of verbal analogies.
Finally, you say that “risk management is an evolving science.” But it’s no more a science than economics or sociology. There’s currently no such thing as a science when it comes to human behavior and interaction. This is part of modern economic theory’s problem – the idea that people act rationally. People do all sorts of unpredictable and irrational things. We fall in love. We defend strangers from attack. We help unknown people when they’re in danger. The risk isn’t economics or capitalism or socialism or unions. We do dumb, inhuman things regardless of the economic system under which we live. We were assholes under communism, and assholes under capitalism. Germans under fascism did honorable and generous things. The risk is humanity, and there doesn’t seem to be much accounting for that.
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Cheers! Sandra. R.
Mathew,
Thanks for the response; it is only through such repartee that we learn from each other’s perspective. However, I have to clear a few things out.
First off, I am not against having a government. Like Milton Friedman, I do not like big governments. I agree that the government is an important player in protecting and providing necessities for its citizens, what I do not agree with is having a government that conducts farcical stress tests on banks and bails out companies that are underperforming. Furthermore, I was not saying that without government intervention the markets would be completely predictable. However, I do stand by the fact that government intervention causes more uncertainty which results in randomness. This is not only my view but basic economic theory. Alan Greenspan is a weak argument to bring up (to support government intervention), as he was one of the biggest proponents for keeping regulation on derivatives to a minimum. Conversely, it was partly his fault that we are in this mess because he refused to increase the interest rates during the booming years of the economy.
It is hard to say that the New Deal era was the best way to control the economy when you are comparing a time of coming out of economic depression with a time you are going into one. However, I do agree some good things happened with the New Deal, such as the Glass?Steagall Act, which separated commercial and investment banking. This law no longer exists with companies like Goldman Sachs and American express becoming bank holding companies, something made possible with the creation of TARP. Furthermore, the government does not have the same amount of money to spend as the deficit has more than tripled since the New Deal era. The money that the government has been spending has been questionable at best. The first installment of TARP was a joke with no one knowing the criteria set for receiving government handouts. The intention of the TARP funding was to help struggling banks and the housing market, however due to inefficient regulation we had gaping loopholes that allowed insurance companies to buy small banks just so they could receive a handout. Even if government spending was done in an efficient manner, it is important to realize that though government spending does play an integral role in getting the economy out of a depression/recession eventually the rest of the economy has to take over. I believe it was Margaret Thatcher who said “The problem with socialism is that you eventually run out of someone else’s money.” With the deficit well past 11 trillion, I think we should take a minute and reflect on her quote.
You bring up the fact that I pick on auto manufacturers and do not talk about large investment banks like Goldman Sachs. I did not mention the banks not making changes and/or taking money for two reasons. One, the banks did change; they had to change their bonus structure as well as the amount of leverage they took on (amongst other changes). Earlier, banks were leveraging up to 30-1 and are now down to as low as 14-1. Furthermore, bank executives from Goldman did not go begging congress for money, it was the BIG 3 who wanted the bailout and did not want to change. Last time I checked, the government forced all of the big banks to take TARP funds in order to not single any one bank out. That said, the government has not been able to recover the principal lent to the auto makers, where as the government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government—Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T—each brought in $100 million to $334 million in profit. It’s easy to blame the investment banks for taking all the tax payers money and giving nothing back, but the facts tell a different story.
As for the CARS program, the program was set to help the US automaker, Toyota has an 18.9 per cent share of vehicles bought so far, putting it ahead of General Motors with 17.6 per cent and Ford with 15.4 per cent. Chrysler is in fifth place, after Honda. What is funny to me is that GM had a 19.6 per cent share of the overall US light-vehicle market in the first seven months of this year, compared with Toyota’s 16.3 per cent, according to Autodata, a New Jersey-based market research firm. Is the program really helping the US Auto Companies? And as far as the program was created to helping those with ‘94 Berettas or ‘88 Novas, this strangely reeks of the same problem we faced with the housing market. Just like everyone “in theory” deserves a new home, a new car may sound nice but is not feasible. However, if for a minute I agree with you, then my point comes up again: Why should only certain cars qualify? Why can’t someone with a ‘96 Sentara get the deal as well? I am not even going to get into how people with old cars that did not qualify for cash for clunkers are not being able to get a decent amount for their cars because the CARS program is giving $4000 dollars for vehicles that are worth $800. My problem is not so much with the deal, but with the premise of it being for the common man, yet the stipulations on it tell a different story.