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Thursday, October 23, 2008

Fooling Themselves

Arnold Kling on the financial Crisis:
Economists ought to admit that we do not know much about what is going on today. Neither do the Fed Chairman and the Treasury Secretary. Of course, the market demand is for "strong" leaders and for "strong" economists, who can fool the public into believing that they have great knowledge. The ones who do this best are those who have fooled themselves.
My guess is still that if the bailout "works" it probably wasn't needed. If it doesn't work - well, then it was a total waste of effort. But we'll never know and we have our "strong" leaders instead. Oh joy!


erp said...

Bret, I question the timing. This crisis has been looming for years, so why bring it to a head now if not to blame the Republicans and enhance Obama's chances to win the election.

Even Greenspan is in on it now saying he was wrong about free markets although he supported the controls the president and McCain proposed in 2005 and which were turned down by the Democrats.

I can kinda understand young politicians compromising their values to get ahead, but old dinosaurs like Greenspan and Colin Powell? It's sickening.

The question is -- are voters buying it?

Harry Eagar said...

It may work. It unquestionably was needed.

It is also unquestionably a corrupt bargain, the greatest transfer of wealth since Alexander's hostile takeover of the Persian Empire.

It would have worked as well (or better) if straight New Deal principles had been followed, and those would have been a lot cheaper.

A combination of dishonest incompetents and mystical economists have given up pretty much the second-worst outcome that anyone could have imagined.

This is a pure failure of free markets, and despite what some mystics were saying just days ago, the proof of that is in the hedge funds. Totally opaque, totally unregulated and doing just as bad as any other kind of paper.

erp is right about the Dems taking over. I warned you guys, but you wouldn't listen. Now the only question is whether the Democratic ascendancy will last 20 years like the last time you guys started believing your own propaganda.

Anonymous said...

I think the New Deal was a far greater transfer of wealth than this bailout. I suspect it's bigger every single year. It's one of many things you tell us that turn out to have no factual basis, so it's not clear why we should listen to your other predictions. Your view seems to be that every economic set back is the fault of free markets. Not to mention that none of us really know what you mean by "free markets". It's certainly not "unregulated".

After all, if you think this bargain was corrupt with a poor outcome, just wait until the Obama/Pelosi/Reid/Frank axis gets in to gear.

erp said...

Harry, since I'm right on such a wide range of issues, I wonder if you'd remind me of the one to which you are referring.

Harry Eagar said...

Ah, yes, absolving the free markets. Like how the hedge funds, not regulated, were performing so much better than the (not very regulated) other parts of the financial system.

Oops. Another inoperative statement.

I have a little essay about that at Restating the Obvious.

Anonymous said...

I didn't claim "much better", only "not as bad as". But even if the hedge funds are doing about the same, then even by your claims there's no difference between regulated and unregulated in this regard. So the cause must lie elsewhere. My view (government intervention and corruption) is consistent with that observation. Yours ("pure market failure"), not so much.

Harry Eagar said...

Nobody was being sufficiently regulated. No adult supervision. Hence, a crash.

Unsupervised markets always crash.

Any counterexamples would be received by me with, so to speak, interest, but they won't be. I've looked.

Harry Eagar said...

From Bloomberg: '3D-Gold Jewellery Holdings Ltd., the company whose deceased chairman created a solid gold toilet, missed a debt payment earlier this month.'

Silly me. And here I've been disparaging the accomplishments of the free market.

Hey Skipper said...


You should to go your local library and grab the Oct 11th issue of The Economist.

There is a long, reasonably detailed precis of how we got here.

Lack of regulation definitely rears its head.

As do a host of other things.

It is safe to say the market contributed to events. Far less so to say it caused them.

Anonymous said...


Someone who thinks two government sponsored and controlled organizations that bought half the mortgages in the USA are negligible influences on the mortgage market is not going to be persuaded by mere facts and reasoned discourse.

Mr. Eagar;

I'll take your solid gold toilet seat and raise you Howard Raines, who walked off with $90M while courtesy of the FMs while being the driving engine of sub-prime mortgages. And to think I have been disparaging the accomplishments of government management.

Howard said...


Your thinking of Howell Raines, but you mean Franklin Raines.

Not only were Fannie and Freddie the 800 pound gorilla in the mortgage market by buying around half the mortgages, it gets worse. Operating unchecked they bought more and more paper underwritten with lower and almost nonexistent standards. Furthermore, and this is key, the implicit government guarantee contributed to the assumption that all of the mortgage backed securities generated by Wall St. were safe as could be. Washingtons King Kong and Wall St.s Godzilla teamed up to threaten everyone else instead of fighting each other.

Many other factors and players contributed to the mess but they are of secondary importance.

The political class will fight any acceptance of blame for their major role in this matter.

Free market - not even close!

Harry Eagar said...

Au contraire. There are two terrific pieces at Bloomberg today about where toxic debt came from.

Not FMx2, who were late to the party by two decades.

I have been using the leverage figure of 30:1 because that is now the customary figure. It appears that the actual ratio was infinity. Trillions of dollars of leverage against $0 capital.

The apotheosis of capitalism: profits without capital.

Aviators call planes with short wings 'flying prostitutes' because they have no visible means of support. Same with financial instruments backed by nothing.

I have been calling it Mugabenomics. As the layers of this onion are peeled back more and more, it turns out I was more right than I knew.

Howard said...

Securitization enabled the greater democratization of credit. As usual Wall St. and the banks went too far too fast and that is their fault. The two largest players of that game in the U.S., Bear Stearns and Lehman Brothers are now gone. They got what they deserved for such lousy risk management. They held large inventories of their own creations and levered up (a little like some Wall St. banks did in 1929).

I place some emphasis on Fannie and Freddie because of their size and the implicit government guarantee. This credit bubble greatly distorted the housing market which is important to the real economy because a house is most peoples largest tangible asset. The poor quality loans, especially the many adjustable rate loans facilitated by the GSEs in the last few years were a significant toxin in the system once the housing market turned down.

It is important to realize how this paper behind the securities was viewed...(from one of the Bloomberg articles you mentioned):

``You don't need a whole equity-research department and relationships with CEOs and CFOs,'' Donovan said. ``You basically needed good computers and distribution. You can always buy a Fannie, Freddie or Ginnie Mae pool. You just go online and buy it. You can't buy a Ford Motor Credit deal, because you have to know people.''

I'm not excusing the over leveraging that went on or misbehavior of a wide variety of actors, but allowing the GSEs to run wild put this process on steroids and was a huge factor in creating the financial mess!

Harry Eagar said...

'As usual Wall St. and the banks went too far too fast'

That's not a bug, it's a feature. I like the 'as usual' part.

Anonymous said...

Here's a good post on the details of how the FM's turned a usual sort of bad market effect in to a major crisis.