An open letter to the left

Steve Horowitz writes to you all:


One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn’t there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don’t stop reading there even if you disagree – now you know how I feel when you claim this mess is a failure of free markets – at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.

I will say that the big I-banks seem to be in a weird place, fiscally speaking – wielding a tremendous amount of financial wealth that cascades throughout the rest of the economy, and yet apparently maniacally devaluing the riskiness of their purchases, and simultaneously pretending that they could understand the long-term interactions of very complex fiscal ‘products’ within an unpredictable economy (i.e. one that does not always go up).

I can always hope that this is an object lesson for those who want to ‘plan’ the economy, or use government policy to create a ‘workers paradise’ here in the US, but I doubt the lesson will sink in.

After doing a ton of research, at the end of the day, I think the bailout is a bad idea – essentially a power-grab by Government types who will use the money to enrich their political allies and punish their political enemies.

But this is the current political trend in the country over the last 2 decades – when there is a problem, surrender your liberties and trust the Ivy League-educated elite who run the country to wield the awesome sword of Government to ‘fix’ the problem.

And yet, it is clear that much (but not all) of the blame in the housing bubble (which precipitated the fiscal bubble-popping) is due to:

  • Zoning and other restrictions that made build-able land far more ‘scarce’ than it should have been.
  • Advocating that Fannie Mae take on extra risk in order to loan money to poorer, and higher-risk people
  • The unwillingness to properly oversee Fannie Mae (which as a quasi-governmental organization, deserves some level of government oversight of risk)

More specifically on that last point – how can we claim that the fiscal failure is a “failure to regulate” when Fannie Mae wasn’t regulated properly in the first place?


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